Back in the mid-199s, it became more and more obvious that the Bank of Japan was prepared to take more and more radical measures in the fight against deflation. Then it was the Bank of Japan that started the most daring monetary experiment in the history of the central bank, which finally brought us new concepts such as zero interest rate (ZRIP) and quantitative easing (QE).

investors can not only predict the depreciation of the yen, but also the huge interest spread brings positive interest spread to those who support this trading strategy or use it as a fixed income. In this case, the yen needs to appreciate by 5% to reach the equilibrium point.

In fact, during 1995-1998, the exchange rate of the US dollar against the Japanese yen rose from 8 to 14. Because the positive spread constitutes a considerable part of the total return of this trading strategy, this strategy was soon called "yen carry trade" (by the way, the fond memories of the yen falling from 8 to 14 during this period are the supporting factors behind many hedge funds that are doing more US-Japan exchange rates).

But until 1998, the yen carry trade was still little known outside the circle. Until then, it was still the plaything of a few hedge funds and fixed-income geniuses. However, in that year, Russia's default caused an uproar, and the market saw the disorderly closure of a large number of risks undertaken by these few people. From Russian government bonds to Danish MBS to Asian currencies, it seems that every asset is "financed" by shorting the yen. LTCM and the proprietary trading departments of Wall Street investment banks that follow them are at the center of the whirlpool. In addition, many, many people, such as JulianRobertson's Tiger Fund, have also been hit hard.

The term "carry trade" has quickly become a common vocabulary in the financial field, so that any short position in Japanese yen or other currencies has been called "carry trade" by some analysts and stock investors recently.

but this is wrong. Think about it, whose interest rate is lower now? America or Japan? Yes, there is no spread now. What about Europe VS Japan? Nor does it exist. Investors short the yen only because they bet on the depreciation of the yen, not the spread.

this means that the price fluctuation of this matching transaction is relatively small compared with the spread.

For example, if you do a carry trade between the Australian dollar and the US dollar, the spread between them is currently about 3%. There is not much room for spreads. Although the recent price fluctuation of the two currencies is very low by historical standards, it is still about 1%. This means that your return is mainly affected by currency appreciation/depreciation, not interest spread. You can call this transaction a positive spread, but you can't call it a carry trade.

The classic currency carry trade comes from the period when many emerging market countries had fixed exchange rates and high interest rates, which was mainly due to the small financial markets and the lack of policy reliability in these economies. But times have changed now. In the field of foreign exchange market, there are few real carry trades. Compared with the potential spread, the exchange rate volatility is too high. The only real opportunities for carry trade in the near future are in the bond market, low policy interest rates and steep yield curves in financial markets of major economies.