Currency markets tend to attract many traders who are new to the practice of speculation in financial markets. The claim is liquidity, leverage possible, the variety of products, opening hours 24h 5 days a week, volatility … among other factors. Popularity we see every day in the many offers of brokers, platforms, systems and tools to operate services free real-time quotes, courses, books, forums, blogs …
But few people understand what fundamental factors moving these markets due to the complexity of factors that influence the price of currencies, among which are: interest rates, strength and economic expectations, trade between countries, price raw materials, besides the fact that they are economic policy instruments available to central banks and governments. With which most investors tend to choose systems and technical tools to operate. Understand some of the reasons that drive these markets can help us in designing our strategies of speculation.
After assisting in recent days to drop a day of 7% to quote AUD / JPY (AUD / JPY) has again into the limelight the carry trade , whose effects can be seen in the following weekly chart scale.
An analysis of the graph indicates that the fall had been brewing days, because in the last 3 weeks has come to build a devaluation of 17% from the highs at 87.50 up to 72.50, leading to levels of a year ago .
So, what is the carry trade?
The practice of carry trade involves borrowing in a currency (sold) with low interest rates and invest that money in another currency (purchased) with higher rates. The benefit achieved is at the rate differential between the currency purchased and sold, as well as the possible revaluation of the purchased currency, while the risk assumed is in its devaluation.
This operation is common and easy to perform in the FOREX market and side effects involved is a recurring increase in demand and price of the currency with higher rates, which will contribute to increasing the profitability of the operation.
The risk is evident when the market perceives the purchased currency risks, as massively large investors undo their positions (selling the currency bought and sold purchase) causing sharp drops it.
A particular version of the carry tradefound in the supply of mortgages multicurrency Spanish banks offered their customers so that they will benefit from lower interest rates Yen or Swiss Franc against the Euro. Multi-currency, conscious or not mortgaged latent risk assumed, are now paying the consequences for the depreciation of the euro against those currencies.
Returning to the fall AUD / JPY, what can be happening?
As noted by the article Financial Times and reproduced by expansion , the difference in interest rates between the existing Australian Dollar 4.50% and the Japanese yen by 0.1%, with the boom of the Australian economy supported on strong exports to China, it led to the opening of operationscarry trade on the AUD / JPY since early 2009.
The omens starting to fly over the Chinese economy reflected in the index Shanghai Composite , which accumulates a 25% drop since last August have impact on alarms that may represent a contraction China ‘s economy in the Australian economy. These fears have caused large investors will massively closing operations carry trade open (selling and buying JPY AUD) and the consequent collapse of the AUD / JPY.
It would thus appear that market movements have their justifications.
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