Foreign Exchange Carry Trade And Its Impact On The Financial Markets

Recently, the carry trade has been focused on the international financial market, especially in the Global financial crisis of 2007-2009, which deteriorating from United States' subprime mortgage crisis.Since Japan has maintained low interest rates and a weak Yen policy, together with abundant supply, the Yen has been the major global carry trade funding target, with hedge funds remained the major participant. During financial crisis period, Yen carry trades should not traditionally be viewed in narrow terms purely as a foreign exchange transaction, but looked as one of biggest market risks by carry trade unwinding suddenly.This paper investigates the relationship between the yen carry trade and the related financial variables in the US and Japan during 2006 from 2008, by the structural vector auto regression (SVAR) model. At the same time, we also analysis the impact and shock of carry trade unwinding.Finally, this paper believes that in order to mitigate market risks under such new market environment, demanding regular close monitoring capital movement, as well as monetary policy making globally coordinate is also deemed necessary. By RMB becoming an international currency, we should be highly wary of USD or GBP becoming the next carry trade funding target.