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What Is Yen Carry Trade And What Kind Of Impact It Can Have On Your Forex Trading Success?
Yen carry trade is a method of currency carry trade involving the Japanese yen. Carry trade is an investment strategy in which an investor borrows (buys) a currency with a low interest rate and lends (sells) a currency with a high interest rate. In this way they may make profits on the difference between the interest rates.
This kind of investment is widespread among banks, governments and other large lending institutions, particularly at times when the the global foreign exchange markets are relatively stable and the international stock markets are mostly bullish. In other words, it can be a good investment strategy at times of world economic stability and growth.
The Japanese yen is the currency most frequently taking part in carry trade. This is because over the past years it has consistently been a primary currency with the lowest interest rate. The Bank of Japan, which controls Japanese interest rates, has established them at a a very low level since the late 1980s. Usually this is under 0.5%.
Theoretically you would not expect carry trade to be lucrative because the currency rates would change to reflect the discrepancy in interest rates and this would balance out the potential profits. However, in practice there is a profit potential as carry trades have the influence of depreciating the borrowed currency. So yen carry trade keeps the yen artificially low.
Certainly there is a risk that the trend will turn but due to the level of control exerted by the Bank of Japan, international confidence is generally quite buoyant. However, in the case of a significant financial crisis in the USA and the other main economic powers the yield of carry trade is bound to fall.
In fact where there is a considerable change in currency rates such that the yen goes up in value against the lent currencies, it is likely for the investors to lose money when it comes to reversing the investment. Since there is a huge amount of money involved in yen carry trade it can have a significant destabilizing influence on the currency markets if market participants suddenly abandon this form of investment.
This effect is known as the unwinding of yen carry trade. It happens when investors become averse to risk which would probably happen when the yen is going up against the lent currencies. This could have a significant influence on the price of yen forex pairs. As we saw, yen carry trade weakens the yen so the effect of the unwinding will be to strengthen the yen side of the pair even further.
Yen carry trade is for the big players in the international money markets. It is not something that an individual forex trader would normally expect to get involved in directly. Still, any forex trader invested in a yen pair needs to understand yen carry trade and its effect on yen prices. Forex signals could be a valuable trading tool to predict, when the trend turns for yen pairs. There are a lot of forex signal services covering yen pairs online. Still, make sure that you trade only reliable forex signals!
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