What Does Yen Carry Trade Means And What Type Of Influence It Could Have On Your Currency Trading Results?

Yen carry trade is a scheme of currency carry trade using 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. Applying this method they can earn money on the difference between the interest rates.

This form of investment is popular with banks, governments and hedge funds, especially at times when the the worldwide currency markets are relatively stable and the worldwide stock markets are broadly bullish. In other words, it can be a successful investment strategy at times of world economic stability and growth.

The Japanese yen is the currency most often involved in carry trade. This is because over the past years it has continuously been a major currency with the lowest interest rate. The Bank of Japan, which controls Japanese interest rates, has determined them at a a very low level since the late 1980s. Often this is under 0.5%.

Theoretically you would not assume carry trade to be profitable as the currency values would adjust to reflect the difference in interest rates and this would balance out the possible profits. Still, in practice there is a profit possibility because carry trades have the impact of weakening the borrowed currency. So yen carry trade keeps the yen artificially weakened.

Of course there is a risk that the tide will turn but due to the level of control exerted by the Bank of Japan, international confidence is typically quite buoyant. On the other hand, in the case of a major financial crisis in the USA and the other main economic powers the yield of carry trade is bound to fall.

Certainly where there is a big change in currency values such that the yen rises in value against the lent currencies, it is possible for the investors to lose money when it comes to reversing the investment. Since there is a massive amount of funds invested in yen carry trade it can have a powerful destabilizing effect on the foreign exchange markets if market players suddenly turn away from this form of investment.

This outcome is known as the unwinding of yen carry trade. It occurs when investors become averse to risk which is likely to happen when the yen is soaring against the lent currencies. This can have a significant impact on the value of yen currency 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 large players in the international financial markets. It is not something that a home based currency trader would usually expect to get involved in directly. However, any forex trader involved in a yen pair needs to be aware of yen carry trade and its influence on yen prices. Forex signals could be a useful trading tool to foretell, when the tide turns for yen pairs. There are plenty of forex signal services covering yen pairs online. However, make sure that you trade only reliable forex signals!

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