Chief Investment Strategist
Carry trading is a popular investment strategy where traders borrow money in a currency with a low interest rate and invest it in a currency with a higher interest rate. The goal is to capture the difference between the interest rates, known as the "carry." This strategy is particularly attractive in times of low volatility, as it relies on stable exchange rates to avoid eroding the gains from interest rate differentials. We discussed more about carry trading in this article.
Historically, the Japanese yen (JPY) and the Swiss franc (CHF) have been the primary funding currencies for carry trades. Both currencies have maintained low interest rates for extended periods, making them cheap to borrow.
However, going into H2, investors may be re-assessing carry strategies with yield differentials likely to narrow, and geopolitical risks expected to spook volatility. These factors challenge the fundamental principles of carry trading—low volatility and interest rate gaps. Consider the below factors:
These factors could make the Chinese yuan (CNH) a more favorable funding currency compared to the JPY and CHF. The People's Bank of China (PBOC) is deliberately guiding the yuan to a weaker position to support the economy and boost exports. This controlled depreciation, combined with low domestic interest rates, suggest yuan could remain on the path of weakness without any immediate concerns of volatility. Q3 will also likely see more volatility around US elections, and the possibility of a second Trump presidency could be seen as a negative for yuan due to tariffs risks.
However, using yuan as a carry trade funder comes with its risks. The Chinese authorities tightly manage the yuan's value through daily fixings and intervene in markets to prevent excessive depreciation, which can limit potential profits from the trade. Moreover, the yuan's liquidity and accessibility in global markets are not as robust as major currencies like the Japanese yen, affecting execution and hedging strategies. Regulatory changes and geopolitical tensions further complicate the landscape, influencing the yuan's stability and attractiveness for carry trades. Therefore, investors considering the yuan for carry trades should closely monitor regulatory policies, market conditions, and geopolitical developments to mitigate risks effectively.
Forex, or FX, involves trading one currency such as the US dollar or Euro for another at an agreed exchange rate. While the forex market is the world’s largest market with round-the-clock trading, it is highly speculative, and you should understand the risks involved.
FX are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading FX with this provider. You should consider whether you understand how FX work and whether you can afford to take the high risk of losing your money.
Recent Macro articles and podcasts:
Weekly FX Chartbooks:
FX 101 Series:
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Commodity Strategy
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Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy