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February 6, 2017

ZAR/JPY: Carry Trade

Recently, we have been doing more investing than trading. My favorite trade at the moment is the South African rand against the Japanese yen. For those of you that do not normally trade exotic currencies, this might seem risky. However, there are several things that you have to keep in mind when we speak of this pair. Without a doubt, this is a 'super-charged' carry trade. The interest rate differential between the two central banks is a whopping 7%, something that is very rare in current trading conditions. In an environment that features so many negative rates, the ZAR will continue to attract a lot of interest.

The pair has been rising for some time, as the Japanese yen continues to struggle overall. However, the real star of this trade is the swap at the end of the day. Swap is something that we don't get much of these days, so the fact that it pays in your favor is a huge advantage as far as we are concerned. The positive swap, and large one at that, ensures that if you are patient enough - there should be gains.We are in a 'buy and hold' mode when it comes to this pair.

The South African rand

The South African rand is a difficult currency at the moment, as there are a lot of concerns with the South African economy. However, Forex traders tend to pay more attention to the interest rate differential, and gold. This is because the rand is heavily influenced by gold exports, and as a result acts as a proxy for gold in the currencies markets. This is much like the Aussie dollar, but with a strong swap. However, you have to keep in mind that the rand also represents a very exotic economy, so it can be sensitive to massive swings in risk appetite. Money most certainly can run from places like South Africa to the safety of places like Japan when trouble appears.

However, if you can hang onto the volatility, the payment every night makes a big difference. For example, the broker that I am using will end up paying me about 44% by the end of the trading year. Obviously, this is only if there is no fluctuation in price, and losses can take away from that. But when the carry trade was en vogue a few years ago, untold numbers of Japanese traders jumped into this trade. I think we are starting to see the end of the Japanese yen rally now, and the trend change will continue. It doesn't mean that it will be easy to deal with, going long any XXX/JPY pair, but being paid so well while waiting certainly doesn't hurt.

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