Of the major currencies, the Japanese Yen has been the strongest in the last few months, while the Australian Dollar has been the weakest. These two currencies have also been the most conspicuous in the Japanese carry trade. That trade is now coming unstuck, precipitating changes of epic proportions.
For those of you who don’t know what the carry trade is, it is essentially a debt/asset position whereby one borrows money at low interest rates and invests that money in higher yielding assets (often with significant leverage). In Japan, after the stock market imploded and interest rates were cut to near zero, the carry trade took on monumental proportions amongst retail investors. See Yves Smith’s tale about this phenomenon from last year.
With an enormous gap between Australian interest rates and Japanese interest rates, buying Australian Dollars and selling Japanese was a particularly good trade for a very long time. However, those days are well and truly over.
The chart below should give one pause as to whether the trade was ever really worth it in the first place. The violent move out of the carry trade has left many with enormous losses.
In the end, it demonstrates the unintended consequences of easy money policies.