The next big market event that will accelerated the global financial crises has unraveled and it is called the carry trade. In essence the carry trade is a strategy used by investors
"sells a certain currency with a relatively low interest rate and then 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 the investor chooses to use".
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The carry trade of choice for the last several years has been the Yen against most foreign currencies because the Bank of Japan (BOJ) has kept its interest rate extremely low for many years. The rates have been low because the BOJ have been forced to deal with chronic deflation as well as multiple recessions. Thus, many around the world who have gotten use to making huge profits off of the Yen leveraged carry trade.
By borrowing the Yen, selling it, and then buying assets outside of Japan created one of the largest bubbles reaching into the hundreds of billions of dollars.
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Moreover, the effect of the carry trade was a lower value of the Yen. We are all aware of the recent market turmoil, whereby everyone is selling everything including throwing the baby out with the bathwater. This panic has now begun a vicious unraveling of the carry trade. Now individuals must sell their assets, turn them into Yen and pay off the original loan. As more and more investors unravel the Yen carry trade, the more the Yen will surge. The more the Yen surges, the more losses individuals will encounter. The direct effects are from the difference in currency value when it in converted back into it original currency. This is on top of loses already realized after selling assets in a panic hast. These events are truly historic and as big of event as the unraveling of the Yen carry trade it is will not be the last.
Great Read on the Economic Situation in the United States.
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