After spending a lot of time reading public forums, it appears that GBP/JPY is the most popular carry trade. I have often questioned if it is the best pair to use to earn on the differentials. For one thing NZD/JPY currently has a much bigger differentials, but I understand why many people do not like it. In percentage terms it has historically moved much more, especially during the carry trade unwinds. If we look at the major unwinding in August 2007 the NZD/JPY pair fell by around 25%. A lot of hedgefunds and banks who were participating this carry trade had major losses. The potential of a major carry trade unwinding has always been far too risky for me to trade a naked carry trade on these pairs. In my hunt for lower risk options I came across the pair NZD/TRY. This is New Zealand dollar and Turkish Lira.
Turkey have a central bank rate of 17.5% and New Zealand have a rate of 8.25%. A differential of 9.25%, much greater than GBP/JPY and NZD/JPY. If we take a look at the pair, we see historically it has faired much much better during a major carry trade unwinding.
As you can see, during the August carry trade unwinding there wasn’t the same disaster as it was for the yen pairs.
There is a lot of interest to be earnt here, but like all the carry trades, there is still considerable risk. Perhaps this is a lower risk pair?
