What do you know about Carry Trade?
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The carry trade is one of the most popular trading strategies in the currency market. Mechanically, putting on a carry trade involves nothing more than buying a high yielding currency and funding it with a low yielding currency, similar to the adage "buy low, sell high."
The most popular carry trades involve buying currency pairs like the Australian dollar/Japanese yen and New Zealand dollar/Japanese yen because the interest rate spreads of these currency pairs are very high. The first step in putting together a carry trade is to find out which currency offers a high yield and which one offers a low yield.
With ongoing interest rates in mind, you can mix and match the currencies with the highest and lowest yields. Interest rates can be changed at any time so forex traders should stay on top of these rates by visiting the websites of their respective central banks.
Since New Zealand and Australia maintained the highest yields while Japan had the lowest, it is hardly surprising that AUD/JPY is the poster child of the carry trades. Currencies are traded in pairs so all an investor needs to do to put on a carry trade is to buy NZD/JPY or AUD/JPY through a forex trading platform with a forex broker.
Over the past decade, investors in other markets have started to put on their own versions of the carry trade by shorting the yen and buying the U.S. or Chinese stocks, for example. This had once fueled a huge speculative bubble in both markets and is the reason why there has been a strong correlation between the carry trades and stocks.
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