New carry trade, EURJPY?

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After the breakdown of the USDJPY carry trade and Fed rate cuts, there seems to be a new winner in the carry trade investing world. Eurozone rates are some of the highest around, and coupled with a low Japanese rate, this is giving hedge funds a new stable carry trade to profit from the difference in interest rates.

High profit in EURJPY

At this time, the Eurozone banks are paying 3.85% per year on banking accounts, while Japanese banks are willing to lend at a rate of just .8% per year, providing 3.05% per year in pure profit. By comparison, the USDJPY carry trade yields a tiny 1.1% per year. The sell off of dollars in favor of Euros is underway both in the oil industry and the growing carry trade.

The bank of Japan is contemplating raising rates yet again, something it has done very few times over the last few years. Japan is known around the world for its low domestic rates, as the banks try to spur economic growth within Japan. Rather than let the credit collect dust, the Bank has decided it would be better to let the market find things to do with a low rate of an even .5%. It is evident that investors are happy with the low rates and willing to speculate in the tricky carry trade position.

Carry trade turnover

Much of the recent gains in the Euro are from the flipping of carry trades. As the Federal Reserve bank has cut US rates, the amount of investors willing to hold US Dollars has dropped in favor of Euros. The EURUSD carry trade looks less promising than a EURJPY carry trade because of the small 1.1% yield.

Heavy demand for oil should keep the USD up, but lower rates create downward selling pressure on the US dollar. When institutions place carry trades, the lending currency is sold in favor of a higher paying currency. In the case of the EURUSD, investors sell dollars in favor of the Euro, which ultimately drives the value of the USD down and pushes the Euro up. The spike is not so prevalent in the EURJPY trade, which has remained reasonably stable. A move from dollars to Euro or from JPY to Euro will continue the huge gains made in just the last year. Euros are heavily overbought because of the distinct carry trade and inflation advantage. Many investors find comfort in holding Euros rather than the US dollar.

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