As you are probably aware, The Japanese Yen and Swiss Franc has been used to fund carry trades a lot in the last few years. It has been highly appealing due to Japanese benchmark currently being 0.5% and the benchmark rate in Switzerland only 2.75%. However, in recent months we have seen a great deal of uncertainty in the global stock markets due to the uncertainties surrounding the current “credit crisis”, this has led to some extreme volatility in the Japanese Yen and Swiss Franc, causing nervousness amongst carry traders. As we know, nervousness can cause some extreme volatility.
How about the US Dollar as an alternative carry trade? The US Dollar Fundamentals are very weak and have been for a while, it has been in a long downtrend against most of the major currencies for a number of years and they are unquestionably on a downward interest rate cycle at present. Currently futures pricing implies a rate cut next month is around 88% likely. Pricing also suggests that a rate of 3.75% before the end of March.
The US benchmark interest rate is certainly higher than Japan and Switzerland, but it could be a lower risk option for carry trades.
In the Carry Trade investors and speculators borrow money from countries with a low benchmark rate and invest it in a in a higher yielding currency, earning the difference between the two.
