Chungwoo: Volatility is Hurting Carry Trade

While covering the emergence of the carry trade over the
last couple years, the Forex Blog has echoed the sentiments of the
self-proclaimed experts, who argued that Japanese interest rates would never
rise enough to seriously threaten the carry trade. Instead, any threats would have to come in
the form of volatility, which would theoretically drive traders to spur the
comparatively high returns of carry trading in favor of low risk. As if on cue, the carry trade has retreated
significantly as the credit crisis aka housing bubble shockwave has rippled
through global capital markets. As the negative fallout builds, many of the
carry traders who braved the first storm are rushing for the exits. Bloomberg News reports:



Volatility implied by dollar-yen currency options expiring
in one week with a strike price near current levels rose to 13.25 percent鈥?Traders quote implied volatility, a gauge of
expected swings in exchange rates, as part of pricing options.



Read More: Yen Advances on
Concern Credit Losses Will Deter Carry Trades