Could the Yen Carry Trade Wind Up as ETF Winds Down?

The yen carry trade was a popular and easy way to make a profit before the market collapse, but the strength of the yen and related exchange traded funds (ETFs) brought it to an end. Until now.

The yen carry trade consisted of borrowing currencies from low interest rate countries like Japan and investing in higher-interest rate countries like New Zealand and Australia. Gary Gordon for ETF Expert reports that during the credit crisis, the yen strengthened by far as Australian dollars and New Zealand dollars declined rapidly. Borrowers had to quickly repay those borrowed yen loans to avoid further losses, further strengthening the yen in a self-fulfilling prophecy-like fashion.

As of late, the Japanese yen ETF has pulled back sharply and is 7.6% off its high reached last December.

Many wonder if the risk-taking has resumed once again among investors. Those who look ahead may assume that the U.S. dollar may resume a downward trend at a time when neither the United States nor Japan will be in a position to raise interest rates. Meanwhile, Australia, New Zealand, Norway… even the European Monetary Union might be in a better position to do so.

• PowerShares DB G-10 Currency Harvest (DBV): up 4% year-to-date

• CurrencyShares Japanese Yen Trust (FXY): down 4.3% year-to-date

• If you believe the yen will continue to depreciate, there’s the ProShares UltraShort Yen (YCS).

Read the disclosure, as Tom Lydon is a member of the board of Rydex Funds.