New Zealand Dollar – Victim of Carry Trade

While the Japanese yen is surely a benefiting currency when it comes to the carry trade panic, some currencies feel extremely bearish at the times of global financial instability and other factors that bring down risk appetites. New Zealand dollar is one such currency.

Carry trade is a global trend in the high-yielding investment industry, where traders buy high-risk currencies such as South African rand and New Zealand dollar, that has a very high interest rate,  with a cheaper currency such as Japanese yen, which costs just 0.5% a year to borrow.

Popularity of the carry trading contributed a lot to the past years of the NZD growth. Traders could earn not only from the huge interest rates difference between New Zealand and Japanese Central Banks, but also from the growing appreciation of the high-yielding currencies. Carry trade has been growing into a enormous bubble for almost 4 years. And it looks like the time for its bursting has come.

The financial crisis based on the subprime lending crash triggered massive buying of the Japanese yen, as the investment safe haven. Strong demand for yen started  to outweigh its offer from the carry trade speculators and it started to grow against riskier currencies. Rising yen began to trigger stop-loss orders of the carry traders, accelerating the yen growth. So, combination of global financial instability and the carry trade stop-losses caused a real rally for the low-yielding currencies.

Too bad for the high-yielders, such as the New Zealand dollar, there is a very high probability of their depreciation, which if left unstopped can inflict damage to many world economies.

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