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AUDJPY Carry Trade
Submitted By: SB Wise Date: October 27, 2010, 08:11:13 AM Views: 18616
Summary: The AUDYJPY carry trade is far and away the most popular interest rate differential forex play in the market today. While it may be hard for relatively inexperienced US investors to wrap their minds around non-dollar denominated investments, more experienced traders are quite comfortable with the leveraged investment.

The AUDYJPY carry trade is far and away the most popular interest rate differential forex play in the market today.  While it may be hard for relatively inexperienced US investors to wrap their minds around non-dollar denominated investments, more experienced traders are quite comfortable with the leveraged investment.

AUDJPY Carry Trade Setup
Setting up the AUDJPY carry trade involves "going long the AUDJPY cross" - meaning ultimately going long AUD (Australian Dollar) and simultaneously short JPY (Japanese Yen).  Each night after the time of day they call "rollover" positions not closed out either collect (or pay) a fee based on the interest rate differential of the trade.  At the present time the interest rates for Australia and Japan are such that those going long the AUD and short the JPY collect a rollover fee daily based on the size of the investment and the current rate differential.  AUD rates have been considerably higher than Yen rates for some time which has resulted in a substantial build up of AUDJPY carry trade positions in the market.

Why the AUDJPY Carry Trade Works
The AUDJPY carry trade works both because of the interest rate differential and the preference of the Japanese Central Bank, which willingly enters the market to devalue its currency relative to important trade partners such as the United States, Australia, and Europe.  Why does it matter that the JCB intervenes in the market? It matters because the weakness of the AUDJPY carry trade setup is the short position, the Japanese Yen has a tendency to appreciate (rise in value) over time due to other economic forces.  The principal economic force which moves the Yen higher is the current account surplus, mostly due to their favorable trade gap with most of the major economic powers.

How the Japanese Central Bank Is a Friend of the AUDJPY Carry Trade
Japan exports a great deal of goods and services and as a result creates a great deal of global demand for Japanese Yen (to pay for goods and services bought from Japan).  Any sort of real economic demand for Yen relative to other currencies creates price appreciation of the Yen versus those currencies. Price appreciation of the Yen reduces the cost competitiveness of Japanese goods and services, and thus hurts (long term) the economic engine of Japan. As the Yen rises relative to important trade partners such as the United States, China, and Europe, the Japanese Central Bank is put under great political pressure to flood the market with Yen (creating supply of Yen) reducing the value of the Yen relative to those key trading partners.  When the Japanese Central Bank intevenes this way it plays directly into the hands of AUDJPY carry trade positions.

A Detailed Look at a AUDJPY Carry Trade Example
Take a look at this detailed AUDJPY carry trade example.  Note the dynamics of leverage and the risks and rewards of the trade.

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March 17, 2011, 09:21:14 AM
It's unbelieveable the movement we've seen in the Yen over the last few days. I think this is what happens when the Yen is allowed to move without much interference.


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