, Columnist
The Yen Is a Currency Trader’s Best Friend and Worst Enemy
Are we on the verge of flash crashes? These carry trades are too lucrative for comfort.
A storm is coming.
Photographer: Kazuhiro Nogi/AFP/Getty Images
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There are two big problems in the world of currency trading.
First, those who engage in carry trades tend — to use Gavekal Research’s founder Louis-Vincent Gave’s words — “eat like a bird and poop like a cow.” This strategy, which borrows money in a country with low interest rates and then invests in one where you can get considerably higher returns, is a leveraged play. While it seems safe buying local government debt, a sudden change in exchange rates can reinforce, or dramatically derail, a trader’s payouts, leading to margin calls and flash crashes.