Carry Trade Strategy
The uncovered interest parity and currency carry trades (30 Marks)
A currency carry trade involves investors looking to exploit interest rate differentials between two currencies and it is thought to be one of the factors that contribute to the empirical violations of the uncovered interest parity (UIP). Choose a pair of funding and investment currencies (you decide pairs ofcurrencyonyourown)andtheirmoneymarketinterestrates(e.g.,monthlyrates,
Carry Trade Strategy
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Carry Trade Strategy
Analyzing the data it becomes evident that my carry trade strategy delivered significant negative returns during specific periods. One of these instances occurred between April 2023 and August 2023, where my investment experienced a loss of USD 14,157.28. To comprehend the factors influencing these negative returns, it is essential to contrast this period with the phases of positive returns.
Periods of Significant Negative Returns (April 2023 - August 2023)
During this time frame, several factors contributed to the unfavorable outcome of my carry trade strategy. Notably, the Federal Reserve, in response to rising inflation, signaled aggressive interest rate hikes since March 2023 (Schneider & Saphir, 2022). Higher interest rates in the US increased the cost of borrowing in US dollars, diminishing the profitability of my carry trade strategy. Besides, the Australia's wage price index, a key economic indicator, exerted pressure on the AUD/USD exchange rate. Market fluctuations in response to this index impacted the value of the Australian dollar, influencing my investment negatively (Saunders & Denniss, 2022).
Periods of Significant Positive Returns (February 2014 - August 2022)
Contrastingly, during the periods of positive returns, several favorable market conditions and economic factors were observed. Primarily,