The economic crisis took away the once-popular yen carry trade, but Daniel Hwang of FOREX.com thinks rate spreads may be widening, presenting new carry trade possibilities.
I’m talking with Dan Hwang about the revival of the carry trade, and Dan, I haven’t heard that phrase in a while. Can you remind me of what it is?
Well, the carry trade essentially is traders and investors trying to take advantage of yield differentials, so what these traders will look to—myself as well—is try to invest in a higher-yielding currency and borrow from a lower-yielding currency, such as the Japanese yen.
How’s that working for you?
Well, it’s been, over the past few years, there’s been a huge carry trade unwind because of the economic meltdown. Central banks have reacted to this by lowering interest rates, and therefore, narrowing that spread.
So, after that unwind, there really was no carry trade, but I think there is potential for this carry trade to return to form this year.
Why?
Well, we’re seeing Japanese rates still near zero. They’re probably not going to go anywhere anytime soon, and if you look at some of the outlooks from the Bank of England, from the European Central Bank (ECB), and the Reserve Bank of Australia (RBA) especially, we are looking for rate hikes out of these central banks within the coming months, and what that does is once again widen the yield spread and attract investors back to these currencies.
We’ve got almost zero interest rates here in the United States—short-term rates, at least—and there are a lot of banks that are borrowing money and then just sitting on it. What are they looking for?
Well, if you look at the US, I think comparative to Japan, I think expectations for hikes out of the Fed are a bit sooner than the bank of Japan, so I do think that at this point, the focus for the carry trade should revert back to the yen.
Okay, borrow from the yen, and then…
I think the RBA is probably going to hike within Q3 or Q4. At this point, the markets dampen expectations for a hike because of Queensland flooding, because of Cyclone Yasi, but if we look at the ultimate long-term effect of this, there is going to be investments in infrastructure rebuilding.
And that should add to Q3 and Q4 GDP ultimately, which should apply further pressure to the RBA to look to hike rates again.
So you like the Australian dollar?
I do long run. Short term, we should see some downside. Long run, though, I do like the Australian dollar.
Any other currencies that are on your radar?
Well, CAD/JPY, mostly commodity currencies. Once again, I do think commodity price gains could see the central banks of these commodity-producing countries look to hike rates sooner rather than later.