Carry Trade Will Not Carry You Away

We should all know by now that forex trading isn’t easy money. In addition, also the relatively easy path of riding on a carry trade is not the best bet at the moment.  

For a very long time, traders could be quite passive: by buying a currency with a high interest rate and selling another with a lower one, enjoying the differential. NZD/JPY and AUD/JPY had a huge interest rate gap. This worked as long as currency values remained stable.

This all blew up when markets collapsed in late 2008. However, with limited global recovery, new opportunities came around: the kiwi and the Aussie even made big gains against the dollar, enabling traders to enjoy both the change in value and the interest rate differentials. The dollar replaced the yen as the funding currency.

Now, at the fourth anniversary of the crisis is behind us, the carry trade could seem attractive using another funding currency: the Swiss franc. The franc is trading almost in tandem with the euro and its debt crisis, and the interest rate nears zero.

So, would Long AUD/CHF work as a carry trade? Not necessarily so. Interest rates are going down in the land down under. Worries about global growth and especially Chinese growth weigh on the Aussie.

In addition, the franc’s peg to the euro, though very successful, is not eternal. A surprising move in Europe could find the SNB unprepared, and the levee might break. A sudden rise in the value of the franc would ruin long months of carrying.

So, perhaps it’s time to return to the yen? With ever escalating rhetoric from Japanese authorities, an intervention to weaken the yen might be seen. Also here, past experience shows yet again, that it may take a very long time until an intervention actually happens, and it isn’t that successful. Building a strategy on such a move could be like building a castle in the sand.

On the other side of the equation, are there other high yielding currencies that could work? Is the kiwi a better option? The interest rate is low and it is also vulnerable to global growth.

Do you carry trade? If so, on which currency pairs? Do you think that the carry trade will make a comeback anytime soon?

Further reading:  5 Most Predictable Currency Pairs