Carry Trades are unwinding.. ..but don’t get carried away!

Last week was very hectic on the currency markets and we saw some very large fluctuations, most notably on the Swiss Franc and the Aussie Dollar. The Swiss Franc benefitted massively from investors running scared and the Aussie lost out as investors sold off positions in this perceived slightlier riskier asset.

Carry trading is where investors borrow money in a low interest bearing currency like the Japanese Yen (0-0.1%) and invest in a high interest bearing currency like the Aussie Dollar (4.75%). The idea here being to exploit the low interest rate on the loan, and maximise the interest rate on the investment.

Such practice is active amongst traders in ‘good times’ when there is lots of market confidence. With the Aussie Dollar it stems from the fact the Aussie is a commodity currency so when the global economy (and hence commodities -natural resources, many of which Australia has in abundance) does well so does the Aussie.

Conversely when there is negative sentiment on the global economy we see these positions unwound and hence the currency concerned (AUD) weaken. Now bringing this all to bear on recent AUDGBP movements we can understand why the Australian Dollar has lost nearly ten cents in the last week. And the likelihood is it will continue since at present no resolution seems apparent in the Eurozone, and global uncertainty remains. GBPCHF and Gold have again hit record highs today, 1.2352 and $1715.35 respectively.

But just because the market is moving against you does not mean it will move indefinitely. Markets rarely move in one direction continuously and despite the substantial losses on the AUDGBP rate there are spikes to take advantage of. Wouldn’t you rather get 1.578 than 1.5951? Despite the turmoil out there, be careful not to panic and rush into a trade at the high of the day. This can make a bad situation worse!

At present more than ever it is crucial to stretch every cent of your currency transfers to avoid heavy losses. We are specialist currency brokers who write this blog for the benefit of our clients and the public alike. We have never had any trouble beating not only the banks but also other brokers. If you have any currency requirements please feel free to contact us on 01494 787 458, or e-mail jmw@currencies.co.uk for a hassle free discussion of the issues that will add or lose value to your currency exchanges.