“Unusually high” Aussie dollar fanning another wave of carry trades

The ‘unusually high” Australian dollar is fanning the return of carry trades according to a recent study of currency trading volume.

 “Australia still has a relatively high interest rate compared to other countries and regions which have almost zero interest rate,” said Vito Henjoto, senior technical strategist at Invast Securities. “This means traders are attracted to trade the Aussie due to the higher returns it delivers compared to other currencies.”

 In a recent research, Invast looked into the trading volume of currency trades in Japan only from 2009-2013. It showed that long trades on the Aussie/Japanese Yen have been steadily creeping up from just below 200,000 (million Yen in January 2009) to more than 1,000,000 (million Yen in May 2013).

 “Give or take a few dips and pullbacks in two or three occasions, long positions on the Aussie dollar (AUD/JPY) have skyrocketed compared to short positions,” Henjoto said.

 The only hiccup and sudden unwinding of the carry trades were noted during the devastating earthquake and tsunami in March 2011. Massive volume of the Japanese Yen was repatriated through global humanitarian aids and individuals winding down their overseas investments.

 He added both the AUD/JPY and NZD/JPY are now considered the benchmark in gauging carry trade appetite, with their relatively high interest rate compared to the other major economies.

 Carry trade involves borrowing from a low yielding currency (e.g. Japanese Yen) to buy a higher yielding one (e.g. Aussie or NZ dollar) to get better returns.

 With the Bank of Japan (BOJ) taking almost a similar stance (to that of the US) of injecting more money into the Japanese economy, the Yen is bound to stay weak. And this could mean Japanese investors and traders will continue to look for better yield elsewhere.

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