BIS reports on carry trades

The latest quarterly review published this week by the Bank for International Settlements in Basle featured an examination of carry trades (https://www.bis.org/publ/qtrpdf/r_qt0709.htm). “Low exchange rate volatility and persistent interest rate differentials have underpinned significant cross-currency positioning in recent years. These positions have often taken the form of currency carry trades, or leveraged cross-currency trading strategies....The effect of carry trade activity on exchange rates is typically asymmetric, and can be significant. The build-up of these positions generally contributes to a steady strengthening of target currencies (associated with high interest rates) and a weakening of funding currencies....when changes in interest rate expectations or volatility lead to a sudden unwinding of carry trades, there is a tendency for target currencies to depreciate and funding currencies to appreciate sharply,” BIS writes.