Which Is the Most Popular Carry Trade Currency Today?

For years Japanese investors converted their low interest rate bearing yen into higher interest dollars in a Forex carry trade. But today the Yen does not lead the pack in this strategy. Which is the most popular carry trade currency today? It is the Taiwanese dollar. Bloomberg writes that the best carry trade today is the currency of Taiwan.

With global currency volatility near a three-month low, conditions are supportive for carry trading in emerging currencies from the Brazilian real to the Thai baht and Russian ruble. The Taiwan dollar trade has outperformed this year, defying concerns that U.S. President Donald Trump may impose protectionist policies that hurt the island’s exports, which are critical to its economy. Overseas shipments have actually been growing.

Despite protectionist talk from the Trump administration, Taiwan is seen as being a beneficiary of expected U.S. economic growth.

Carry Trade

Just what is a carry trade and is it something that you can profit from? According to Investopedia this is the definition of currency carry trade.

A currency carry trade is a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

The risk of this strategy is that the value of the high interest rate currency will fall more than what the trade is making from the interest rate differential. Traders who use this approach need to appropriately hedge their positions to protect against huge losses.

Taiwan and Trump

For the time being the Taiwan dollar is the most popular currency carry trade but will it last? The Atlantic writes about Taiwan and the Trumpian uncertainty principle.

Core to Donald Trump’s appeal, both at home and abroad, is that he doesn’t seem to care how he’s supposed to behave. He certainly doesn’t fuss over offending Chinese nationalist sensibilities. This perhaps explains, in part, his curious adventure in China-Taiwan diplomacy.

On December 2, Tsai Ing-Wen, the president of Taiwan, called Trump to congratulate him on his victory, making her the first Taiwanese president in decades to speak directly to her American counterpart. “It’s like a beam of new hope,” one Taiwanese housemaker told CNN, after it happened. Nine days after the call, Trump told The Wall Street Journal, “Everything is under negotiation including One China,” a stunning reference to a loose doctrine under which Washington can regard Taiwan as an ally and maintain unofficial diplomatic relations with Taipei, so long as it doesn’t acknowledge Taiwanese independence.

So if Trump wanted to irritate China he did the correct thing in suggesting that the one China principle was up for renegotiation. Now, of course, the Trump administration has caved in to China and one China is back. This sort of thing is the core of the uncertainty principle with Trump. Traders who are currently making money on the Taiwan carry trade may wish to make sure that they are securely hedging their risk before the next Trump phone call and policy switch.