Please note that as this coming Friday (Good Friday, 18th April) is a holiday for all important Forex markets, there will be no OmiCronFX commentary on that day.
The “Carry trade” is the name
given to the practice of attempting to borrow money in low cost environments
and invest it, or loan it out, in high return situations. Depending on the
combination of funding currency and carry instrument chosen, the level of risk
is either increased or limited. As is normal, the higher the risk assumed the
greater the return the investor would expect to attain.
The operation of the carry
trade can have an effect on currency exchange rates. It tends to drive up the
value of currencies in those regions where high interest rates exist, and drive
down rates where interest is low.
Above is a schematic of the
makeup of the carry trade. It is not cast in stone, and indeed it changes from
time to time. Right now, for example, there is a suspicion that the carry trade
in Yen crosses is in the course of being dismantled. This should have the
effect of strengthening the Yen. The reason for this is that some investors
believe that the ultra-low interest rate environment in Japan might be
in danger of coming to an end.
If this is true, the
depreciation of the Yen, which has been in train since late 2012, might be
about to come to an end. In that case the USDJPY chart could be about to
undergo a reversal from a dominant rising trend to one that is in decline.
The study of
economics is not a science. Note that I did not write “exact science”. It is
not a science at all. It is a set of beliefs that are held by individual
practitioners and invoked under any and all conditions. Economists are
Keynesians, Monetarists or follow the Austrian School in
the same way as the devout adhere unquestionably to Mohammed or Christ or L.
Ron Hubbard. Economists cannot agree among themselves on the right course of
action under any given set of circumstances and they most certainly cannot
predict what will happen in the future.
This should
be of concern to those who subscribe to fundamental analysis of stocks, bonds
and other investments, including Forex. Those who rely on technical analysis
are likely to be somewhat more focused, but the state-of-the-art here is also
one of flux. Up front and centre at present is the place that computers have to
play in developments. Automation is now a requirement for price action
research, for learning, for trade entry and management, and for testing
assumptions and determining the optimum values for the parameters to be used in
algorithmic routines.
That is what
we do at OmiCronFX.
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