Throughout 2002, 2003, and part of 2004, the Australian dollar (AUD), New Zealand dollar (NZD), and British pound (GBP) were the most popular currencies to buy for carry trades because these countries offered some of the highest interest rates in the world. (Their central banks were the first to raise rates when the global economy slowed down after the tech bubble burst in 2000.)
The Japanese yen (JPY), Swiss franc (CHF), and U.S. dollar (USD), on the other hand, were the most popular currencies to sell in carry trades because these countries had some of the lowest interest rates. The U.S. and Switzerland were, in fact, two of the last major countries to raise rates, while Japan still maintains a zero interest rate policy.
The most popular carry trades included AUD/JPY, GBP/JPY, GBP/CHF, AUD/USD, and NZD/USD. Carry traders were able to benefit from interest income as well as capital appreciation as other traders piled into the same trades. However, all good things eventually come to an end, and for most of 2005 these currency pairs either sold off or remained range-bound — to the frustration of many carry traders.
Yet hope is not completely lost for those who still want to get involved in carry trades. The U.S. dollar/Japanese yen (USD/JPY) currency pair has emerged as the hottest carry trade of 2005. The popularity of this pair as the new carry trade has even triumphed over any concerns about the Japanese yen rallying on the back of Chinese revaluation.
USD/JPY did rally on the announcement, but most losses were quickly recouped as the market shifted its attention back to interest rates.
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