From the September 01, 2011 issue of Futures Magazine • Subscribe!

How to trade the carry trade

An interest rate story

Traders naturally flock from low-yielding to high-yielding environments. For instance, the traditional currency to sell has been the yen, as the Bank of Japan has been forced to keep rates virtually at zero for many years because of Japan's disinflationary economy.

This situation has persisted since the mid-1990s, making it profitable to borrow Japanese yen to fund activities in other currencies. Conversely, the rapid and sustained industrialization of China meant economic success for the raw materials-rich antipodean economies, and high interest rates made the Australian and New Zealand dollars the favorite currencies to buy not only for the yield-starved Japanese investors, but for traders around the world (see "It's all in the interest," below).

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