Many traders view the carry trade as a longer-term (i.e., days, weeks or months) approach since the interest you earn is based on the trade’s length. In theory, however, it’s possible to buy a currency pair such as the British pound/Japanese Yen (GBP/JPY), whose base currency’s interest rate (4.75 percent) is much higher than the quote currency’s rate (0 percent), just before the day’s rollover, earn the rollover credit and exit the trade following this event.
Because GBP/JPY’s rollover credit is three times as large on Wednesdays to account for the weekend (see sidebar), this study focuses on the currency pair’s behavior in the days and hours surrounding this weekly occurrence. We analyzed daily GBP/JPY performance since March 2001 to find out how Wednesday’s triple rollover costs influenced this pair’s behavior. We then studied hourly GBP/JPY price data surrounding each day’s 5 p.m. rollover time since January 2003 to find out how this event affected intraday price moves.
Overall, GBP/JPY slumped on Monday and Tuesday, but rose Wednesday through Friday. On an intraday basis, GBP/JPY climbed as the 5 p.m. rollover approached and sold off in the early evening — a pattern that was magnified on Wednesday. Both tendencies suggest traders bid up prices in anticipation of the daily rollover, especially Wednesday’s three day interest-rate payoff.
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