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The Yen Carry Trade

What is the carry trade? In what seems like a game with little risk, one can borrow dollars for next to nothing and plough them into other assets. The low interest rate “carry” and the eventual rollover of assets can result in large profits. For example, you could borrow one million dollars at the low interest rate of 1% featuring a carrying cost of just $10,000.

You could then decide to invest that capital into an asset class with a higher yield (say 8%), earning yourself $70,000. As a result of the interest rate spread between the two, you would earn $70,000 with just a keystroke. At 10 to 1 leverage, you could earn $700,000 for the trade.

Carry trade strategy

The dollar, because of low interest rates, is increasingly becoming a vehicle for the carry trade. Global bankers borrow the dollar while investing in higher dividend paying currencies pocketing the differences. Their bet is that domestic deficit spending policies and Federal Reserve policies geared to help an ailing economy will keep the dollar interest rate low and make the trade profitable long term.

The Japanese economy has experienced near zero growth because of their low-interest policies. A permanent trade surplus as accrued to Japan because of extremely low interest rates. Debtors gain from low interest rates but savers lose.

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But if you think about it, investing in American stocks was what got you into trouble. We still seem to be a little iffy on finding the correct capitalism mix of freedom versus regulation. But what if you looked east, at China or India? They welcome your investment dollars, and those companies really seem much more robust than the local ones. If you want, you could check out something called the MCSI Emerging Markets Index to find out what countries are doing best. Making your stock investments through growth funds is a smart idea now. It will make you less nervous. And if you want to invest in foreign markets, this would help you get the mix between local and foreign markets exactly right. The trick, though, is, not to put all your eggs in one growth fund, but to spread the risk..

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Yen carry trade strategy

Yen Carry Trade Example: Generally, traders look to buy currencies in countries with high interest rates and seek to short currencies in countries that offer low interest rates. GBP/JPY, GBP/CHF, AUD/JPY, EUR/JPY, CAD/JPY, and USD/JPY are currency pairs that are usually selected to apply this strategy. Second tier currencies are more volatile, carry higher interest rate incentives and more profit potential.

Unravel Risk: Everyone will have to close their shorts on the dollar if the trade falls apart. This will cause those assets that were invested elsewhere to be liquidated. On a worldwide basis, panic in order to cover those short can cause severe financial angst. Which in turn may cause severe “asset busts” if the bubble is big enough and cause major economic disruptions. The crash can be as big as the asset bubble buildup.

Consider what would happen if panic results. In the era of cradle-to-grave promises, when money owed came due, they would just keep printing more money. It worked to stem the banking crisis. It worked to stem the banking crisis. However, sooner or later a sovereign debt crisis in the West will reach a critical stage and the ensuing financial earthquake will shake all financial arenas.

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How to trade currency

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Stay on top of political and economic trends that impact the future of business both nationally and globally. Stay informed and keep an ear to the Yen carry trade as well as the Dollar carry trade. Follow the global bell-weather signals for shifts in tidal soveriegn money flows.


The Yen Carry Trade The Yen Carry Trade

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