The intense volatility in emerging market currencies cost many carry traders dearly as the US Federal Reserve winds down its quantitative easing programme. However, that same shift in the monetary cycle could slowly resurrect the popularity of the carry trade. The carry trade, which involves borrowing a low interest rate currency to buy a higher yielding one and pocketing the difference, has had a rough time since 2008. The period has seen regular bouts of volatility, which can quickly render carry trades unprofitable. But with a number developed countries looking poised to raise interest rates in the not too distant future, UK, US and New Zealand has already started, there could be a case for the carry trade to make a gradual come back. By Justin Pugsley, Markets Analyst MahiFX. Follow @MahiFX on twitter That’s particularly the case – if – those rising interest rates are a sign of a more benign economic environment where the carry trade can take flourish over longer time frames. Indeed, Haruhiko Kuroda, the governor of the Bank of Japan told a parliamentary committee this week that there is a growing momentum towards JPY funded carry trades. USD/HUF – this type of choppy action makes carry trades difficult Interest rate differentials likely to remain small On the downside the interest rate differentials are likely to remain small. Inflationary pressures are weak, economic growth is hardly stellar and debt burdens are still high in many developed countries suggesting interest rates will remain relatively low. That should lead to less volatility in the currency markets, but that observation comes with some caveats, namely China. The economic situation in China appears to be deteriorating with growing evidence that years of rampant speculation, over-lending and over-investment are coming to a head. It’s still not yet clear if China’s policy makers will be able to manage any potential fallout or how they will do it. If China does see a crisis similar to the one that hit the developed world in 2007-8 then that would certainly reduce carry trade opportunities due to volatility. There would also be large trend divergences between the safe haven currencies such as CHF, JPY, USD and the more risk orientated currencies of developed countries such as GBP, NZD and AUD. For the time being the carry trade will probably only make sense for shorter time frames than what was often witnessed prior to 2008 as there are still a number of potential crises that could yet play out. Further reading: 5 Most Predictable Currency Pairs – Q2 2014 Justin Pugsley Justin Pugsley MahiFX is headed by David Cooney, former global co-head of currency options and e-FX trading at Barclays Capital and responsible for the award winning e-commerce platform BARX and Susan Cooney, former head of e-FX Institutional Sales in Europe for Barclays Capital. Operating as a market maker, MahiFX provides traders direct access to institutional level execution speeds and spreads through its proprietary-built fully automated pricing and risk management technology, lowering the cost of retail forex trading. MahiFX global operations are headquartered in Christchurch, New Zealand with offices in London, UK with development and support teams in both locations for 24 hour service. The company is regulated by The Australian Securities and Investments Commission (ASIC), Australiaâ€™s corporate, markets and financial services regulator. Article by Justin Pugsley, Markets AnalystÂ MahiFXÂ Follow MahiFX onÂ twitterÂ and onÂ facebookÂ Disclaimer: This material is considered a public relations communication for general information purposes and does not contain, and should not be construed as containing, investment advice or an investment recommendation, or an offer of or solicitation for any transactions in financial instruments. MahiFX makes no representation and assumes no liability as to the accuracy or completeness of the information provided. The use of MahiFXâ€™s services must be based on your own research and advice, and no reliance should be placed on any information provided or comment made by any director, officer or employee of MahiFX. Any opinions expressed may be personal to the author, and may not reflect the opinions of MahiFX, and are subject to change without notice View All Post By Justin Pugsley Forex News Today: Daily Trading News share Read Next Investors scaled back their exposure to equities following Facebook Scott Smith 8 years The intense volatility in emerging market currencies cost many carry traders dearly as the US Federal Reserve winds down its quantitative easing programme. However, that same shift in the monetary cycle could slowly resurrect the popularity of the carry trade. The carry trade, which involves borrowing a low interest rate currency to buy a higher yielding one and pocketing the difference, has had a rough time since 2008. The period has seen regular bouts of volatility, which can quickly render carry trades unprofitable. 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