Carry Trade refers to the strategy of involving investors in selling a particular currency with a relatively low-interest rate. Then, the funds obtained in such transactions are utilized in purchasing a different currency that yields a higher rate of interest. In such a case, the investor is in no doubt aligned to make a profit. Ideally, the profit is as a result of the rate difference calculations between the values of the two currencies (Anzuini & Fornari 470).
Japan gives a perfect example when it comes to learning about Carry Trade. The country has long been operating in deficits that have exceeded the 200% mark. Having borrowed a huge amount of foreign currency to take the advantage brought about by Carry Trade, Japan’s situation can simply be described as a crisis. This is because the US dollar specifically has seen its value steadily gain over the Yen hence making the dollar-yen calculations skewed adversely negative against Japan. In a lemans language, it implies that Japan is on the fate of suffering even more in terms of deficits as a result of the abrupt gain of the dollar against the Japanese Yen. This happened particularly after the victory of Donald Trump Candidacy.
Currently, Japanese fiscal representatives have suggested that they are about to ignite that ten Trillion dollars Carry Trade they had invested earlier. Evidently, such a move has to do with Australia since the initial investment was made to the Australian dollar. It was assumed that the Australian dollar yielded low-interest rate and hence buying such currency and investing the income to the US dollar would be an ideal business. However, since the swearing in of President Trump, the calculation expected did not to materialize meaning that Japan is in the course of registering further huge loss.
Works Cited
Anzuini, Alessio, and Fabio Fornari. "Macroeconomic Determinants of Carry Trade Activity." Review of International Economics, vol. 20, no. 3, 2012, pp. 468-488.
