Forex

Carry Trade Falls Sharply on Risk Aversion Investors are becoming more risk averse on speculation major banks could announce more write downs tied to subprime home loans, a situation that has been benefiting the Japanese yen and triggering a major sell-off on carry trades. Not surprisingly, during last week, the DailyFX Dynamic Carry Trade Portfolio was down by 540 pips. The biggest loss was taken in the short position we held in the Japanese yen with 415 pips loss. Moreover, since stop losses are activated when we have a weekly close below the specified stop level, we are out of the USDJPY position. Looking ahead, we believe the sharp drop in the Australian dollar, opened a window of opportunity to get long AUD/USD at current levels. In fact, we believe higher commodity prices (Gold is above $800) driven by the demand by China (growing at more than 10 percent per year) should continue to support the Aussie and other commodity currencies.