Era of Carry Trade Is Coming

Some industrial powers have seen the economic recovery to different extents, making their central banks embark on the withdrawal from the quantitative easing (QE), such as Canada, New Zealand, and the U.S. on the horizon. In addition, the cycle of interest-rate hikes may be carried out as a response to the worsening inflation. However, some economies are not well-prepared for the withdrawal in the short run, let alone the increase in interest rates. Against the backdrop of extreme monetary policies, traders specializing in the carry trade are bound to seize this golden opportunity in a bid to pocket wealth generated by interest spreads.

Among major currencies, NZD is the first choice when it comes to the carry trade as its interest rate is often much higher than that of its counterparts. The craze for buying NZD and selling currencies with lower interest rates can date from 2000 to the end of 2006, during which NZD/JPY increased by 5545 points. The other fad dates back to the period from early 2009 to the end of 2013, amid which the figure was 4985 points.

Carry trade is quite popular among forex investors, especially those from Japan. At present, the Reserve Bank of New Zealand has ended the purchase of bonds. The meeting on August 18th has decided to postpone the interest-rate hikes because the pandemic was wreaking havoc nationwide. According to Christian Hawkesby, Assistant Governor and General Manager of Economics, Financial Markets, and Banking of the Reserve Bank, the plan of increasing interest rates by 50 points was spoiled due to the COVID outbreak. Consequently, the common idea shared by the financial market is that the Reserve Bank will announce the interest-rate hikes in the meeting on October 6th to curb the inflation and the overheated real estate market in the country.

As for the previous cycles of hikes, the Reserve Bank of New Zealand was extremely hawkish in this regard, thus leading NZD to be the currency with the highest interest rates compared to its counterparts of other industrial powers. As for the increase in a currency pair of NZD and a low-interest one, the cycle often exceeded four years, making this the most popular among traders conducting carry trade. At present, NZD/JPY can be the first choice targeted by them because Japan hasnt had the interest-rate hikes in hand even its interest rate is negative. It is estimated that all individual traders and professional investors in the country will engage in the carry trade relating to NZD/JPY.

The pair of NZD/CHF also has a chance to be targeted. The reason for this situation is that the Swiss National Bank (SNB) is unlikely to increase the interest rate (-0.75% currently) in the short term, thus stepping up the profits from spreads. In addition, NZD/USD is appropriate to the short-term speculation as the U.S. has seen the pressure of withdrawal and may launch the cycles of interest-rate hikes next year. Therefore, when purchasing NZD, traders should consider the sale of some currencies without the pressure of hikes in interest rates as their first choice.