For some time now, several major pairs often trapped in almost flat chart, makes it difficult for traders to take advantage. With G3 currencies (USD, Euro, and Yen) regulator defend record low rate, it is no wonder that investors are losing patience. What could forex traders do in this circumstances? Of course, carry trade.

For some time now, several major pairs often trapped in almost flat chart, makes it difficult for traders to take advantage. With G3 currencies (USD, Euro, and Yen) regulator defend record low rate, it is no wonder that investors are losing patience. What could forex traders do in this circumstances? Of course, carry trade.

Market Slumped, Forex Flattened

Financial market activity has mutual relationship with national economic activity, as reflected by economic data and private companies financial reports. Good economic growth refers to better performances from stocks, bonds, and mutual funds. In that situation, risk/reward tend to be of good proportion and are able to attract investors. But amid an ongoing global slowdown, many people backed down and may choose to hold cash rather than invest their money in financial market. Be it stocks, bonds, mutual funds, or derivatives, financial instruments are essentially building higher risk than ever.

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Meanwhile, financial market activities is one of many factors that drive demands and supplies of a certain country's currency. For example, when the government issued new series of bonds, then its currency tend to go up due to the rising demands of the currency. Stock index does not necessarily influence currency exchange rate, but bigger flow of foreign capitals into a country will support its currency exchange rate.

Because of that, when challenged by the danger of capital flight and unconducive economy, Indonesian central bank, Bank Indonesia, chose to hike bechmark interest rate. Interest rate differences between Indonesia and advanced countries are hoped to bring about support for the falling Indonesian Rupiah.

What Interest Rate Means For Forex Market

From the aforementioned example, we could conclude that forex market also relies on interest rates to drive trade volumes and volatility. Consequently, when leading central banks defend super-low interest rate, then forex market activities in the country dropped. Long term investors moves their money to stocks with better risk/reward proportion (lead to bullish stock indexes). On the other hand, forex market traders shifts to countries with higher interest rate, such as New Zealand and Turkey. For forex traders, it means that cross and exotic pairs are becoming increasingly attractive, more than the bigger majors.  

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Dean Popplewell from Forbes last week wrote that the US subdued talks about the Fed rate hike implies carry trade will continue to reign. Therefore, currencies such as New Zealand Dollar (NZD), Australian Dollar (AUD), South African Rand (ZAR), and Turkish Lira (TRY) will be much sought after.

Take Advantage Of Carry Trade

Carry trade refers to trading practices by taking advantage of two currencies' interest rate differences by selling the currency with lower rate and buying the currency with higher rate. The bigger the gap, the higher its profit potential. However, not all currencies are suitable for carry trade. Extremely weak currencies, such as Indonesian Rupiah tend to show worsening performance, due to bad fundamental economy. If you are interested to piggyback on carry trade trend, choose currencies with relatively better fundamental basis. Currently, major currency which has become the target of carry trade sell are the Yen and the USD, while carry trade buy targets New Zealand Dollar, as well as CAD and AUD.

Evidently, carry trade from USD to NZD has risen 3% within this month. It is mainly driven by Reserve Bank of New Zealand's hawkish sentiment versus the Fed's dovish moments. Sam Tuck from ANZ Bank New Zealand quoted by Bloomberg this morning said, Whenever there’s a broad-based dollar selloff, the kiwi tends to outperform.
 Carry trade during online forex trading actually is quite complicated, particularly because trading accounts are available in one fixed denominator (commonly is USD) that could hamper carry trade in crosses. Additionally, the result of carry trade could only be taken in a rather long term (one to twelve months or more), while profiting in forex trading is an effort to take advantage of price ups-and-downs in shorter time span. However, forex trader could piggyback on the trend.

If you are bored by flat charts, then it might be good for you to take a look at NZDUSD and Yen crosses. Recently, those currency pairs offer higher trading volumes and volatility, due to the carry trade trend. What's more, geopolitical tension in Ukraine and Iraq remains a concern, and surely will provide many risky but constant price fluctuations.


Related Articles:
Currency Pairs Characteristics (1): The Four Major Pairs
Currency Pairs Characteristics (2): CAD, CHF, And NZD
Three Reasons Why Your Fundamental Analysis Does Not Work