Australian dollar and Yen carry trade regimes and their determinants

Transcription

1 Ausralan dollar and Yen carry rade regmes and her deermnans Suk-Joong Km* Dscplne of Fnance The Unversy of Sydney Busness School The Unversy of Sydney 2006 NSW Ausrala January 2015 Absrac: Ths paper nvesgaes he me varyng carry rade regme probables of major currences over he perod 2 Jan 1999 o 31 Dec We fnd evdence for carry rades nvolvng he Ausralan Dollar (AUD), Euro and Yen agans he US Dollar durng non-crss perods. However, here s no evdence for cross currency carry rades. We also nvesgae he deermnans of he AUD and JPY carry rades. For daly horzon, for boh he AUD and JPY, carry rade probables are sgnfcanly hgher when realzed volales and rade volume are lower. In addon, for he AUD, carry rade probables are hgher when 1) unexpecedly low nflaon and unemploymen raes, and unexpeced neres rae hke from he RBA are announced n Ausrala, and 2) here are posve AUD order flows. For he JPY, carry rades are more lkely when 1) unexpecedly low announcemens of machne orders and Tanken n Japan and unexpecedly hgh US real sale growh and Fed polcy rae are announced, and 2) when here are negave JPY order flows. For weekly horzon, ne long fuures posons ncrease he AUD carry rade probables, bu hey lower he JPY probables. Furhermore, we fnd sgnfcan dfferences n he role of he deermnans before and afer he GFC perod. JEL: E44; F31; G15 Keywords: currency carry rade, Markov regme shfng, macroeconomc news, Order flows Acknowledgemen: Ths research was funded by a faculy research gran of he Unversy of Sydney Busness School. I wsh o hank Seve Sachel, Terry Waler, Ian Marsh and Masayuk Susa for useful commens and suggesons. * Tel: , FAX: , Emal: sukjoong.km@sydney.edu.au

2 1. Inroducon One of he buldng blocks of he heory of nernaonal fnance s neres rae pary n boh covered and uncovered forms. Ineres rae pary suggess equlbrum relaonshps beween movemens n an exchange rae beween wo naonal currences and her equvalen neres raes over her holdng perod. The currency ha has a hgher nomnal neres rae, herefore a posve neres rae dfferenal, s expeced o fall n value agans he oher currency by roughly he same amoun as he neres rae dfferenal, n he absence of ransacon coss. For nsance, f a one year money marke neres rae n he UK and he U.S. are 5% and 2% p.a., respecvely, hen he Pound (GBP) s expeced o deprecae a an annual rae roughly equal o he neres rae dfferenal of 3% p.a.. The GBP would hen be raded a an annual dscoun of 3% n he forward marke. However, emprcal evdence hus far suggess ha neres rae dfferenal (or forward premum) s a noorously unrelable measure of he fuure spo exchange rae movemens. No only s he magnude of forecas ncorrec, even he acual drecon of exchange rae movemen s ofen oppose o wha s predced. Tha s, hgher yeldng currences end o apprecae over he relevan holdng perod raher han o deprecae (Burnsde e al., 2006). Ths s mos lkely due o a combnaon of hgher real neres rae and rsk premum n he hgh yeldng currency. Ths presens an opporuny for currency nvesors who are wllng o ake unhedged speculave posons borrowng n low yeldng currences (fundng currences, e.g. he Japanese Yen) and nvesng n hgher yeldng currences (nvesmen currences, e.g. mos emergng marke currences and commody currences such as he Ausralan Dollar, he New Zealand Dollar, ec.). Ths sraegy, known as a currency carry rade, has emerged as an alernave asse class n a porfolo of nvesmens (e.g. Das, Kadapakkam and Tse, 2013, Lusg, Roussanov and Verdelhan, 2014). However, hs s n drec volaon of Uncovered Ineres rae Pary (UIP). For nsance, he Ausralan Dollar has been one of he more mporan 1

3 nvesmen currences due o he perssen posve neres rae dfferenal agans he US Dollar and oher major currences, especally agans he Japanese Yen, snce he early 2000s. One of he movaons for rsk akers s he speculaon ha ex ane rsk premum hough o be ncluded n he hgher yeldng currences would no be compleely offse by ex pos exchange rae changes, leadng o suffcen rewards for akng he rsk. For nsance, Couder and Mgnon (2013) repor ha soveregn defaul rsk, as measured by soveregn Cred Defaul Swap spreads, conrbues o carry rade gans durng booms. The downsde rsk or crash rsk of carry rade sraeges relaes o unexpecedly hgher levels of exchange rae volaly leadng o hgher probables of sgnfcan losses from he exposed posons. The relevan leraure repors evdence of profable carry rade sraeges. Burnsde e al. (2008) repor sgnfcan gans from carry rades where carry rades dversfed over a number of currences mprove he ypcal Sharpe rao of hedge funds by more han 50%. Colaveccho (2008) repors sgnfcan carry rade opporunes nvolvng Yen. Mollck and Assefa (2011) repor evdence n suppor of carry rades nvolvng Yen and Swss Frac. Jurek (2014) repors profable carry rades nvolvng G10 currences where crash rsk prema s responsble for one-hrd of he excess reurns. In addon, a number of researchers repor spllover effecs from carry rade acves. Cheung, Cheung and He (2012) fnd varous measures of Yen carry rades have varyng degrees of mpac on sock marke reurns n Ausrala, Canada, UK, Mexco and New Zealand. Smlarly, Fung, Tse and Zhao (2013) fnd ha casaly runs from carry rades o Asan sock markes. Lee, and Chang (2013) repor smlar resuls for USD carry rades. They fnd ha G10 currency carry rade reurns Granger cause sock marke reurns bu no vce versa, and ha he mpac s larger durng bull marke. In conras, Fong (2013) repors opmsm n he sock marke seems o lead o currency carry rades by hedge funds. Tse and Zhao (2012) fnd 2

4 sgnfcan correlaon bu no causaly beween US sock reurns and carry rades, however sock marke volaly Granger causes carry rades. Ths paper ams o nvesgae he exsence and he me varyng naure of carry rade relaonshps among major currences, he Euro (EUR), he Japanese Yen (JPY), he Pound (GBP), and he Ausralan Dollar (AUD), boh agans he US Dollar (USD) and agans each oher a daly and weekly horzons over he perod 2 Jan 1999 o 31 Dec Secondly, we examne he carry rades agans he AUD and JPY n deal n order o assess he emprcal deermnans of profable carry rades and her reversals. In parcular, he underlyng marke (fnancal markes n general and foregn exchange marke n parcular) condons ha foser (or rgger abrup unwndng of) carry rades wll be emprcally deermned. We concenrae on hese wo currences because unlke he EUR where here s no clear and conssen carry rade drecons durng he sample, he combnaons of exchange rae movemens and neres rae dfferenals sugges ha he AUD would have been used as an nvesmen currency and he JPY as a fundng currency durng he sample perod. In addon, only he AUD and JPY show evdence of sgnfcan carry rade for boh daly and weekly horzons. The mporan fndngs of hs paper are summarzed as follows. Frs, alhough we fnd srong evdence of carry rade acves nvolvng he USD (agans he AUD, EUR and JPY a he daly nvesmen horzon, and he AUD and JPY a weekly horzon), here s no such relaonshp beween cross currences a eher horzon. In general, carry rades are reversed durng he varous epsodes of fnancal marke urmol such as he perod surroundng 9/11 n 2001, he Global Fnancal Crss (GFC) perod of and he Eurozone crss perod of The carry rade probables for he JPY s less sragh forward o nerpre, however 3

5 he GFC perod shows a endency of lower carry rade probables. Furhermore, he AUD has been more conssenly n he carry rade regme han oher currences. Second, here s a sgnfcan srucural break around he oubreak of he GFC n relaon o he mpac of he deermnans of boh he AUD and JYP carry rades. For daly horzon, we fnd he deermnans have me varyng mpac. In he pre-gfc perod, carry rade probables are sgnfcanly hgher n response o hgher realzed volaly of he USD/AUD exchange rae, number of rades, unexpeced nflaon and unexpeced unemploymen announcemens n Ausrala. They are sgnfcanly hgher when order flows are posve (more buyer han seller naled rade of AUD) and when he RBA unexpecedly ncreased neres raes. For he JPY, he carry rade probables are sgnfcanly lower when realzed volaly s hgh and he probables are lower when he US unexpecedly rases he Fed funds rae and when unexpeced rse n real sales growh n he US. In he pos-gfc sample, almos all of he deermnans are now nsgnfcan for he AUD carry rades. For he JPY, The carry rade probables no longer respond o he JPY volaly, however, reacs o rade volume and order flows. In addon, only he Japanese macroeconomc news maer. Thrd, for weekly horzon, we fnd ha for he AUD carry rades he marke acvy varables are also more nfluenal n he Pre-GFC perod. In addon, realzed skewness, order flow and ne long fuures posons on he AUD have a posve nfluence on he carry rade probables. For he JPY, speculave fuures posons on he currency maers n boh sample, however, dfferen combnaons of deermnans are relevan for each subsample. The oucome of he nvesgaon provdes sgnfcan nsghs no he me varyng paerns of carry rade probables of major currences and he reacon funcons of he AUD and JPY carry raders. Knowledge ganed from hs nvesgaon s useful for all ypes of parcpans n he AUD and JPY markes, n parcular. These nclude fund managers who 4

6 would benef from day o day probables of he crash rsk n order o mplemen an approprae currency hedge. Furhermore, hs nformaon would be an mporan facor (.e. as a sgnal of changes n sysemc rsk) n he respecve cenral banks polcy formulaon o acheve sysem sably. The res of hs paper s organzed as follows. Secon 2 presens dscusson on he daa and emprcal mehodologes used n hs paper, secon 3 dscusses he emprcal resuls, and secon 4 offers conclusons. 2. Emprcal mehodologes 2.1 Markov regme shfng models for currency carry rades The presence of currency carry rades can be approxmaed as devaons from ex pos UIP condons, and s shown below n (1). Where S n S (1 (1, n *, n ) ) (1) S = The USD exchange raes defned as uns of he USD per one un of he AUD, EUR, JPY and GBP. n = Invesmen horzon, daly and weekly *, n,, n n perod neres rae n he U.S. and n Ausrala, he Eurozone, Japan and he UK a me, respecvely. The USD exchange raes and London money marke neres raes for each currency a daly (overngh) and weekly horzons are colleced a 5pm GMT n London and hey are obaned from Daasream. A devaon from he UIP condon above mples a poenally profable carry rade opporuny. Formally, he UIP condon n (1) s esed n a regresson model of he form shown below: 5

7 S ln S n * (, n, n ) n (2) If UIP holds, he consan would be nsgnfcan and he slope coeffcen would be equal o posve one. Ths suggess, n general, ha a posve neres rae dfferenal n favor of he US s assocaed wh a proporonae apprecaon of he foregn currency over he relevan holdng perod leavng zero prof from he exercse. For carry rades are poenally unprofable. On he oher hand, f s negave and sascally sgnfcan, here s a poenal for carry rade profs. For he carry rades ha use foregn currency as an nvesmen currency, a one percenage pon fall n he neres rae dfferenal (e.g. due o an ncrease n he foregn neres rae, *,n ) leads o hgher posve LHS whch represens ncome from he rade, gven consan USD cos. Smlarly, a negave for a rade usng foregn currency as a fundng currency, mples ha a one percenage ncrease n he neres rae dfferenal (represenng a hgher reurn n he USD s assocaed wh a deprecaon of he fundng currency a +1 reducng he amoun necessary for repaymen n he USD. Under favorable marke condons currency speculaors would nves n hgh yeldng currences fnanced by lower cos currences. A necessary condon s an expecaon of he nvesmen currency connung o apprecae (or a leas no deprecae as much as wha s predced by he UIP) under a low volaly envronmen. A crash rsk rses as he marke envronmen becomes more volale where a sudden reversal of he exchange rae movemen caused by carry raders reversng her posons smulaneously becomes more lkely. In general, we observe a slow accumulaon of carry rade posons under a low uncerany envronmen whch may lead o a sudden reversal as some hreshold level of marke uncerany s reached. 6

8 Fgure 1, n graphs 1A-4A and 1B-4B s, shows he graphs of he USD exchange rae movemens and he neres rae dfferenals n md quoes beween he US and foregn counres a daly horzon. The foregn currences are presened n he order of he AUD, EUR, JPY and GBP. The correspondng weekly graphs are shown n Fgure 2. There s a common feaure n he neres rae dfferenals across he four cases whereby a pronounced down rend from 2001 s reversed n A sharper bu shorer downrend from 2007 s vsble and connues unl he end of These largely follow he U.S. moneary polcy cycles of polcy rae cung surroundng he 9/11 and GFC evens. I s noceable ha he neres rae dfferenals have been negave for he AUD and GBP for he mos of he sample whle he reverse s rue for he JPY. Ths ndcaes ha he frs wo currences could have been used as nvesmen currences and he JPY as a fundng currency for he US carry rades. On he oher hand, boh posve and negave neres rae dfferenal perods exs for he EUR. To a smlar exen here s a common rend n he USD exchange raes. The foregn currences have been ganng on he USD snce 2001 unl an abrup reversal n md-2008 for all currences excep for he JPY. For he AUD and JPY, he uprend has been resored from early 2009, however for he EUR and GBP, here s no clear up or downrend for he recen perod. Furhermore, for all currences here s a mx of posve and negave co-movemens beween neres dfferenal and exchange rae. The UIP condon suggess ha here would be a posve relaonshp beween he wo and he perods of negave co-movemens mply a volaon of hs condon. For he mos of he sample perod a negave relaonshp s shown for mos exchange rae-neres rae dfferenal pars. I s noceable ha an upward movemen n neres rae dfferenal concdes wh a downward movemen n exchange rae over he perods of early 1999 o md-2001 and early 2005 o md-2006 n all cases excep for he JPY. The reverse relaonshp s shown for he perods of md-2001 o md-2004 and md-2009 o 7

9 lae 2011 n all cases. There are also perods of posve co-movemens and hese are mosly surroundng he GFC perods of md-2008 o lae Ths paper ams o nvesgae he exsence and naure of carry rade relaonshps beween he USD and oher major currences, he EUR, JPY, GBP and AUD as a frs nsance. The nvesgaon s conduced va a Markov regme shfng model of he UIP and follows a smlar approach aken by Colaveccho (2008).The esmang equaons shown below are adoped from he UPI condon n (2). S ln S n n * ( ST ) ( ST ) (, n, n ) 2 ~ ( 0, ( ST )) n n (3) Where ST s an unobserved sae varable a me, n s holdng perod daly and weekly. The daly and weekly USD exchange raes and money marke neres raes are observed a 5pm London me. We specfy wo saes (or regmes) and each sae wll have dsnc values for each of he hree parameers. The frs sae (ST1) s a profable carry rade regme and he second (ST2) s he reversal of carry rade. We expec he slope coeffcen (ST1) o be negave and sascally sgnfcan whle (ST2) s posve, sgnfcan and greaer han one or nsgnfcan. 2 2 Also, we expec he sae one o have a lower volaly,.e., ST ) ( ST ). The ( 1 2 unobservable sae varable ST s modelled o evolve accordng o he followng me varyng ranson probables: 8

10 P Pr( ST 1 ST 1) (4) 11, P 12, P 21, P 22, Pr( ST Pr( ST Pr( ST 1 ST ST 2 ST 1 1 2) 1) 2) Where Pj, are he probables of movng from sae n perod -1 o sae j n perod. The Markov regme shfng model s hen esmaed by maxmzng he lkelhood funcon as dscussed n Hamlon (1994). We hen generae a me seres of smoohed carry rade regme probables for each foregn currency and nvesgae he me varyng naure of hese probables The deermnans of carry rade regme probables for he AUD and JPY The approach aken n he paper o model he AUD and JPY carry rades s n wo seps. Frs, we esmae he AUD and JPY carry rade regme probables va he wo-sae Markov regme shfng model as hghlghed n secon 2.1 above. The second sage nvesgaon s o model he me seres of carry rade regme probables on a selecon of marke relaed varables ha poenally nfluence carry rade decsons. We choose he AUD and JPY for dealed analyses because unlke he EUR, boh currences have provded opporunes for carry rade n one drecon, he AUD as an nvesmen and he JPY as a fundng currency. In addon, boh currences show sgnfcan carry rade regmes for boh daly and weekly horzons. The leraure has concenraed on exchange rae volaly as a deermnan of he crash rsk of carry rades. For example, Colaveccho (2008) uses he Yen/USD volaly as he lone deermnan of he carry rade reversal rsk, and Menkhoff e al. (2012) repor a negave lnk beween nnovaons from global foregn exchange volaly rsk and hgh yeldng currences. 1 Ichue and Koyama (2011) use a four-sae regme shfng model wh hgh/low mean and hgh/low volaly saes n he UIP equaon. However, hs level of breakdown n he regmes s unnecessary n he curren case of nvesgang one currency where he drecon of carry rade has always been n one way. 9

11 Pelomäk (2011) repors ha hedge funds Yen carry rade sraeges are condonal on s mpled volaly. In a relaed research, Chrsansen e al. (2012) employ he US equy marke volaly ndex (VIX), and he US neres rae spreads over LIBOR and T-Bll raes o explan he ranson from one carry rade sae o he oher n her Logsc Smooh Transon Regresson model.. Baksh and Panayoov (2013) fnd ha n addon o currency volales a commody ndex was useful n explanng USD carry rades. Cenedese, Sarno and Tsakas (2014) repor ha a large fuure loss from carry rades resuls from hgher foregn exchage marke volales. Anzun and Fornar (2012) repor ha longer erm gans from carry rades can be orgnaed from demand and confdence shocks n he economy as well as undexpeced wdenng of neres rae dfferenals. Alhough currency speculaors consder currency reurn volaly as an mporan deermnan of carry rade/crash rsk probables, s a coarse and aggregae measure of he underlyng marke condons ha drecly nfluence carry rades. Drec measures of he underlyng componens of marke condons would yeld beer nsghs no he reacon funcons of currency carry raders. In hs paper we use a number of marke acvy measures ha more drecly convey currency speculaors rsk appees. These are realzed volaly, realzed skewness, number of rades, and order flows of he AUD and JPY for each radng day. In addon, we nclude scheduled nformaon arrval ha njecs radable nformaon o he marke. We examne he news componens of major macroeconomc announcemens n Ausralan and he US for he AUD carry rade nvesgaons, and he Japanese and he US news for he JPY carry rade nvesgaons a daly horzon nvesgaons. For he weekly horzon, we examne ne long posons of he AUD and JPY fuures conracs a he Chcago Mercanle Exchange n addon o aggregae news nensy varables. The regresson model s shown below. 10

12 RP p q r s u RP RV NumTrade RS RP RV NumTrade RS News_Num News_Num for daly horzon for weekly horzon u 1 USNews_Num FP News News FuPos USNews_Num 1 v 1 USNews USNews OF OF (5) RP = Fsher ransformed smoohed Carry rade regme probables of AUD or JPY. RV = Realzed volaly calculaed from ck by ck rades of he AUD or JPY agans he USD NumTrade = Toal number of rades whn he relevan horzon daly and weekly RS = Realzed skewness OF = Order flow of calculaed as he dfference beween buyer naed rade mnus seller naed rades. News_Num. USNews_Num = News, USNews News nensy varables for Ausrala or Japan and he US, respecvely. They are he number of scheduled announcemens whn each nvesmen horzon daly and weekly = The news componens n he scheduled macroeconomc announcemens. They are sandardzed news calculaed as he dfference beween acual and medan expeced fgures dvded by he sandard error of he dfference. Boh acual and medal expecaons daa are sourced from Bloomberg. FuPos = Ne long posons of he AUD or JPY fuures conracs n he Chcago Mercanle Exchange. The Fsher ransformed carry rade regme (RP ) probables s he dependen varable n (5). Compared o he unransformed regme probables whch can ake values beween 0 (no carry rade or carry rade reversal) and 1 (carry rade regme), he Fsher ransformed probably seres can poenally have any numercal value. The raw and Fsher ransformed carry rade probables for he AUD and JPY for he daly and weekly horzons are shown n Panel A and B of Fgure 3, respecvely. The ransformed probables rean he same paern as her raw counerpars bu he range has been more han doubled n all cases. We consder lags (up o p) of he dependen varable o accoun for poenal auocorrelaon srucure. In addon, we examne he opmal lag srucures for he realzed exchange rae volaly, RV. As volaly ncreases he rsk of AUD carry rade ncreases a he same me and hs would ncrease he probably of a carry rade reversal - he probably of movng from sae 1 (ST1, carry rade regme) o sae 2 (ST2, non-carry rade regme), P12, and 11

13 he probably of sayng n sae 2, P22, would also rse as he hgher crash rsk more han offses poenal carry rade opporunes. The coeffcen, RV, s expeced o be negave. Tme varyng skewness measure of he exchange rae reurns would also be useful n modelng asymmerc naure of exchange rae movemens. For nsance, Brunnermeer e al. (2008) fnd a negave relaonshp beween carry rade crash rsk and exchange rae reurn skewness. In he curren case, negave skewness suggess a fa al n he area of he AUD or JPY deprecaon. Thus an ncrease n he magnude of a negave skewness or a decrease n he magnude of he posve skewness would ndcae an ncreased lkelhood of furher fuure rse AUD or JPY deprecaon leadng o carry rade reversals for he AUD and profable JPY carry rades, gven sable neres rae dfferenals. In a smlar ven, Dobrynskaya (2014) suggess a downsde rsk facor o explan carry rade reurns. In our case, he coeffcen RS, s expeced o be posve for he AUD and negave for he JPY. In addon, rade volume also conveys mporan nformaon abou he foregn exchange marke condons. Trade volume s proxed by number of execued rades, NumTrade whn a gven horzon, daly and weekly. The coeffcen for he volume measure, NumTrade, can poenally have boh posve and negave sgns dependng on wha movemen sn rade volume s proxyng for. If hgher volume s due mosly o heerogeneous (nformed) raders explong prvae nformaon hen hgher volaly s lkely, n whch case a negave coeffcen s expeced. Conversely, f hgher rade volume s due mosly o lqudy ransacons, may no be relaed o volaly and hence he coeffcen may be eher nsgnfcan or posve. Order flows, OF, s also consdered as a deermnan. There has been a growng aenon pad o foregn exchange order flow as a leadng ndcaor of currency movemens. A domnance of buyer naed AUD rades would be an ndcaon of a rsng probably of carry rade mplyng a posve OF. On he oher hand, for he JPY order flow, 12

14 more buyer naed JPY rades would lead o a lower carry rade probably mplyng a negave OF coeffcen. The marke acvy relaed varables dscussed above over he daly and weekly horzons are calculaed from ck by ck rade daa from Reuers Deal 3000 radng plaform whch we obaned from he Thomson Reuers Tck Hsory daabase va SIRCA. The daly horzon s from 5pm London me from day o day +1. The weekly horzon s from 5pm London close on Tuesday o 5pm on Tuesday one week laer. 2 For daly horzon, we also consder scheduled macroeconomc news from Ausrala and he US for he AUD carry rades and news from Japan and he US for he JPY carry rades. Ths s a smlar approach o Huchson and Sushko (2013) who use Japanese macroeconomc news o explan he rsk reversals, proxed by opon prces, of Yen carry rades. They fnd blaeral rade balance news s he mos nfluencal. Marke parcpans expecaons on mpendng daa releases are already prced n and as such hey wll respond only o announcemens only f here s a sgnfcan devaon from he expeced value, and hey need o respond quckly o new nformaon. A a broad level, he macroeconomc nformaon arrval would provde radable nformaon poenally mpacng varous measures of marke acves. In addon, he ac of releasng nformaon, regardless of news conen, could also poenally have an mpac on nformaon heerogeney n he marke leadng o an overall ncrease n marke uncerany. We proxy he nformaon nensy by aggregang he number of macroeconomc announcemens made n Ausralan, Japanese and he U.S n each radng and use he resulng daly sums (and weekly sums for weekly horzon) as a news nensy varable for each of he hree counres, respecvely. If on average, more nformaon arrval 2 Tuesday o Tuesday weekly horzon s seleced o concde wh he observaon frequency of one of he deermnans a he weekly horzon. The speculave posonng daa on he AUD from he US Commody Fuures Tradng Commsson repors are released on Tuesdays. However, he regme shfng esmaon resuls are robus o he choce of sarng day for weekly horzon. 13

15 adds o nformaon asymmery, we would see a negave nfluence (a negave news nensy coeffcen) on he carry rade regme probably. On he oher hand, f more nformaon helps resolve nformaon asymmery o some exen here would be eher no mpac on he curren carry rade probables or a posve mpac. 3 We also consder he news conens of he scheduled macroeconomc announcemens n he hree counres nvolved n he analyses, Ausrala, Japan and he US. Insead of consderng all economc varables ha are announced, we concenrae on hose announcemens ha have been shown o maer more n he leraure. These are CPI nflaon, Curren accoun balance, GDP, RBA s cash rae, Real sales growh and Unemploymen rae for Ausrala; and naonal CPI, Curren accoun balance, GDP, Trade balance, GDP, jobless rae, Merchandse order and Tankan ndex for Japan. For he US, we use Curren accoun balance, CPI, FOMC rae decson, GDP, non-farm payroll, purchasng manager ndex, advanced reals sales and unemploymen rae. Each news varable s consruced by akng a dfference beween acual and medan survey expecaons and hen scalng by s sandard devaon, as frs used n Balduzz, Elon and Green (2001). Appendx A repors he deals of he scheduled announcemens used n hs paper. Boh he acual and medan expecaons of he announced varables are obaned from Bloomberg. 4 In general, hose announcemens ha are knows o apprecae he AUD (e.g. hgher economc acvy varables and lower nflaon) and unancpaed RBA s polcy neres rae ncreases are lkely o encourage he carry rade no he AUD. On he oher hand, hose news ha are lkely o lead o a deprecaon of he JPY 3 Huchson and Shshko (2013) have a smlar approach n erms of usng macroeconomc news o explan carry rade acves. They repor ha rade balance news s mporan n explanng Japanese Yen carry rade, as approxmaed by he prcng of downsde rsk n he Yen opon. 4 The me samp for he announcemens from all hree counres are n he US Easern Sandard Tme (GMT-4 or -5 dependng on he summer me perod n he U.S.) n he Bloomberg daabase. The daly horzon s from 5pm GMT on day -1 o 5pm GMT on day so all of he announcemens excep for he U.S. CPI and FOMC announcemens occur whn hs perod, as a resul he news varables are examned conemporaneously. For he wo U.S. varables, he announcemens are made afer 5pm GMT (see Appendx A) and so hese are used wh a lag of one day. 14

16 would be assocaed wh profable carry raded ou of he JPY (e.g. unexpecedly bad news n Tanken survey). The correspondng US news are expeced o have he oppose mpac. For weekly horzon, we only use weekly news nensy varables as macroeconomc news varables are no praccal. In addon, we consder he poson mbalance n he AUD and JPY fuures conracs, FuPos, calculaed from daa obaned from he US fuures exchanges. Currency fuures are commonly used for speculave purposes and he ne posons of oal open neress of raders can be used as a proxy for carry rade acves. Commody Fuures Tradng Commsson (CFTC) n he U.S. comples a weekly posons repor on he fuures conracs raded n he Chcago Mercanle Exchange, where he AUD and JPY are raded conracs. Ne long poson on a currency by noncommercal raders can be a proxy for a carry rade poson where he foregn currency s he nvesmen currency (Brunnermeer e al.,2008). A weekly change n he ne long poson of he AUD and JPY fuures posons wll hen be used as ndcaons of he lkely carry rades no he AUD and ou of he JPY, respecvely. The coeffcen, FP, s hen expeced o be posve for he AUD and negave for he JPY. Table 3 repors he summary sascs of he AUD and JPY carry rade regme probables and he regressors used n he analyses for boh daly and weekly horzons. For all varables, sgnfcan devaons from normal dsrbuonal characerscs are evden. However, here s no evdence of a un roo n any of he seres. The Fsher ransformed regme probables have hgher means and sandard devaons compared o he unransformed ones as expeced. In addon, hey also have lower skewness and kuross. 15

17 3. Emprcal resuls 3.1 Carry rade regme probables of foregn currences agans he USD The esmaon resuls of he Markov regme models of currency carry rades agans he USD are repored n Table 1. Panel A shows he esmaons for he daly horzon and Panel B shows he weekly horzon equvalens. The wo regme probables, P11 and P22, are close o one, alhough he former s larger han he laer, n all cases. Ths suggess once eher regme 1 (carry rade) or regme 2 (non-carry rade) s n place, s lkely ha he same regme wll connue o he nex day (and nex week), for example wh a probably of 0.99 and 0.96 for he wo regmes for he AUD, respecvely. The sandard error of esmaon for regme 1, (ST1), s lower han ha of regme 2, (ST2), n all cases. Regme 2 s hus denfed as he hgh volaly regme where exsng carry rades would reverse and new carry rades are prevened from akng place. Ths s verfed by he UIP coeffcen, (ST2), beng eher nsgnfcan (he AUD and EUR) or posve and sgnfcan (he JPY and GBP). The UIP coeffcen for regme 1, (ST1), s negave n all cases and sgnfcan for all bu he GBP ndcang poenally profable carry rades n hese hree currences agans he USD. Panel B repors weekly horzon esmaons. The qualave resuls are smlar o he daly horzon esmaons. However, here are now only wo currences ha show evdence for carry rades, he AUD and JPY. Moreover, he sandard errors of he esmaons are consderably larger (a leas by a facor or wo) for boh regmes compared o he daly horzon esmaons. The me seres of he smoohed carry rade probables are shown n graphs 1C-4C n Fgure 1 for he daly horzon. The perods of carry rades, as ndcaed by he regme probables beng close o one, largely concde wh he perods of negave co-movemens denfed n he prevous secon n all cases excep for he JPY. For he AUD, unl he oubreak of he GFC n 2007 carry rade regme probables sayed close o one excep for a few occasons n 2001, 2003 and he frs par of From md-2007 o early-2008 carry 16

18 rade regme probables have flucuaed beween he wo exremes and reurned brefly o mosly near one unl md Beween md-2008 and md-2009, he probables sayed near zero, bu aferwards he carry rade regme reurned once agan, excep for bref reversals n md 2010 and lae The paern of EUR carry rade probables s qualavely smlar o ha of he AUD alhough he perods of reversals are longer whch also shows up n a hgher P22 coeffcen for he EUR (0.98 agans 0.96 for he AUD). The JPY carry rade probables are less sragh forward o nerpre, however he GFC perod shows a endency of lower carry rade probables. Fgure 2 shows he weekly horzon equvalens. The paerns of movemens n he exchange rae, neres rae dfferenal and carry rade probables are conssen wh he daly horzon paerns n all cases. Snce clear nvesmen and fundng currences exs n our sample n erms of perssen neres rae dfferenals n one drecon (e.g. he JPY beng he fundng currency and he AUD and he GBP beng he nvesmen currences), would be worhwhle nvesgang he lkelhood of cross currency carry rades beween approprae currency pars such as he JPY agans he AUD and GBP. Alhough markes exs for he cross currences hey are consderably smaller and llqud compared o he wo relevan USD exchange raes. 5 Ths suggess ha for mmedacy of ransacons he wo USD exchange raes are lkely o be used for carry rades raher han he consderably llqud cross exchange rae. We consruc sx pars of cross exchange raes usng he four currences we consder, and hese are AUD&EUR, AUD&JPY, AUD&GBP, EUR&JPY, EUR&GBP and JPY&GBP. Table 2 repors he cross currency carry rade esmaons. For daly horzon (Panel A), alhough he lower volaly regme 1 coeffcen s negave n all cases, excep for he AUD&JPY par, here s no evdence 5 For example, on 1 Dec 2011 he number of drec rades beween he EUR and JPY was 2,520. Whereas he correspondng number of ransacons for he EUR/USD and he JPY/USD were 20,466 and 6,873, respecvely (Auhor s calculaon usng EBS s ck by ck ransacon daa). 17

19 of sascal sgnfcan n any cross exchange raes. Panel B of Table 2 repors he weekly horzon esmaons. The UIP coeffcen s now margnally sgnfcan a 10% for he AUD&EUR par. However, here s no evdence for carry rades for he res of he cross exchange raes. Ths suggess ha even hough here mgh be opporunes for drec parng of conssen fundng and nvesmen currences va cross exchange rae markes (e.g. he JPY and AUD), sgnfcan carry rades mosly go hrough he USD marke where mmedacy of ransacon s assured. 3.2 The deermnans of he AUD carry rade regmes The nvesgaon resuls for he deermnans of daly AUD carry rade regme probables are repored n Tables 4A, 4B and 4C for whole sample, pre-gfc and pos-gfc samples, respecvely. Table 4A shows he whole sample, 2 Jan 1999 o 31 Dec 2012, esmaon resuls. The frs group of esmaon resuls (column 2 and 3) show only he marke acvy varables and he Ausralan and US news nensy varables. We deermned ha only he frs lag s requred for he dependen varable and RV, and none s requred for NumTrade and OF. Realzed skewness, RS, s no sgnfcan n any of he esmaon perods for daly horzon so s dropped from he analyses. For weekly horzon, RS requres one lag n all hree specfcaons (shown n Table 6). The coeffcen for he lagged dependen varable s posve and close o one whch s no surprsng consderng he hgh sae regme probables (P11) observed above. As per expecaon, RV coeffcen s negave suggesng ha a hgh exchange rae volaly perod s assocaed wh carry rade reversals. Ths s conssen wh he fndngs of Balle and Chang (2011) where a low volaly regme s more conducve for a UIP, and Cenedese, Sarno and Tsakas (2014) who repor larger fuure losses of carry rade posons are assocaed wh hgh foregn exchange volaly. Trade volume, NumTrade, also shows a negave relaonshp 18

20 ndcang ha a hgher volume s assocaed wh poenal carry rade reversals. Fnally, he posve and sgnfcan order flow coeffcen suggess ha ncreasng buyer (seller) naed rades sgnal mpendng apprecaon of he AUD, leadng o hgher (lower) levels of profably of he carry rade no he AUD for a gven neres rae dfferenal. When s ncluded, he Ausralan news nensy varable (ANews_Num), s sgnfcanly negave. Ths suggess ha, on average, he days wh large number of scheduled macroeconomc announcemens are assocaed wh a hgher probably of carry rade reversal. Tha s, currency carry rades are sensve o nformaon arrvals. The arrval of US nformaon, however, dd no regser any response n he AUD carry rades. The second group of columns (4 and 5) repor nclude he Ausralan macroeconomc news and he hrd group of columns (6 and 7) show he resuls also ncludng he U.S. news. Only one each from sx Ausralan macroeconomc news and egh US news shows a sgnfcan mpac on he AUD carry rade probably. An unexpeced Ausralan unemploymen leads o a lower carry rade probably as he news would be assocaed wh an mpendng AUD deprecaon. The U.S. GDP news lowers he AUD carry rades probables as an apprecaon of he USD s mpled. Boh of hese news announcemens sugges poenal suppor for he AUD and hence hgher lkelhood of he AUD carry rade beng susaned. However, n general, macroeconomc news end no o have sgnfcan explanaory power for he whole sample esmaons. Table 4B and 4C repor pre- and pos-gfc perod esmaons, respecvely. We break he sample on he dae of Lehman brohers collapse, 13 h Sep 2008, as wasn unl afer he collapse ha markes were convnced of he crss. 6 There s no qualave dfference compared o he whole sample resuls n he marke acvy varables; all have he same sgn 6 We also used earler and laer daes for he break pon. However, he qualave resuls are he same. 19

21 and sgnfcance, excep for NumTrade and OF where he coeffcens are somewha larger and sascally sgnfcan compared o he whole sample. The mos noable dfference s n he Ausralan news. There are now a oal of hree sgnfcan news varables. These are unexpeced CPI nflaon, RBA cash rae adjusmens as well as he unemploymen rae news. An unexpeced CPI nflaon lowers he carry rade probably va an expecaon of an AUD deprecaon leadng o a lower AUD carry rade prof. On he oher hand, an unexpeced change n he RBA s cash rae decsons have a posve mpac. An unexpeced rae hke (cu) s assocaed wh a hgher probably of carry rade as he reurns from he carry rades no he AUD are expeced o be hgher. As n he whole sample, he U.S. news agan fal o elc any sgnfcan responses excep for he GDP news whch reans he negave coeffcen. Table 4C repors he pos-gfc esmaon resuls. There s no longer any sgnfcan relaonshp beween he deermnans and he carry rade regme probables. None of he marke acvy varables are sgnfcan excep for he margnally sgnfcan frs lag of RV a 10%. The relevance of he scheduled news varables have been subsanally reduced as well. The only sgnfcan news remanng s he Ausralan curren accoun news whch s barely sgnfcan a 10%. The negave coeffcen ndcaes an unexpeced mprovemen leads o a fall n he probably, whch s couner nuve. Table 5 repors he weekly horzon esmaon resuls. For he whole sample, here s sll a negave relaonshp beween RV and NumTrade on he one hand and he AUD carry rade probables on he oher hand. Order flows maers only n he pre-gfc subsample and only a 10%. The frs lag of RS s sgnfcan and posve n he whole sample and boh conemporaneous and frs lag are sgnfcan n he pre-gfc sample. The posve sgn suggess ha as marke parcpans observe hgher frequences of he AUD apprecaons n weekly radng paerns hey become less concerned abou carry rade reversals. In suppor of 20

22 hs vew, we also repor he posve and sgnfcan order flow coeffcen n he pre-gfc sample. In addon, fuures marke speculave posons have sgnfcan mpac on he probables. As per expecaon, more speculave buy han sell AUD fuures posons conrbued o he expecaon of he AUD apprecaon leadng o hgher carry rade probables. 7 As n he daly nvesgaons, he news nensy varables s assocaed wh a hgher lkelhood of carry rade reversal. Ths suggess ha ranqul marke condons are mporan for he connuaon of speculave carry rades. The marke dd no reac o he U.S. news nensy varable, however. The Pos-GFC perod shows a lack of any role played by he deermnans as n he daly horzon esmaons. In sum, we fnd ha for boh daly and weekly horzons, realzed volaly, rade volume and he number of scheduled news released decreased carry rade probables. On he oher hand, posve order flow and macroeconomc news ha are assocaed wh an AUD apprecaon (unexpeced RBA polcy rae ncrease and US unemploymen) ncrease he AUD carry rade probables, whereas hose ha sugges worsenng Ausralan economc condons (unexpeced hgher nflaon and unemploymen raes) lower he probables. For weekly horzon, we fnd realzed skewness and ne long fuures posons on he AUD end o rase he carry rade probables. Furhermore, we fnd ha here s a sgnfcan srucural break around he GFC perod. Specfcally, mos of he explanaory power of he deermnans are shown only n he pre-grc perod. Fnally, only Ausralan macroeconomc news, n general, maer for he AUD regme probables. 7 Huchson and Shshko (2013) repor smlar close lnk beween Japanese Yen carry rade rsk reversal and Yen speculave fuures poson. 21

23 3.3 The deermnans of he JPY carry rade regmes The nvesgaon resuls for he deermnans of daly JPY carry rade regme probables are repored n Tables 6A, 6B and 6C for whole sample, pre-gfc and pos-gfc samples, respecvely. In he whole sample resuls shown n Table 6A, RV and NumTrade are negave and sgnfcan, as n he AUD carry rade case, suggesng ha hgh radng volume and volaly dscourage carry rade speculaons. Unlke he AUD case, however, OF s nsgnfcan n all hree specfcaons. The Japanese macroeconomc news does no have any mpac on he carry rade probables. However, wo US news show sgnfcan responses. The US reals sales and he FED s neres rae decsons have sgnfcan posve nfluence suggesng ha unexpecedly hgh reals sales growh and unexpeced FED rae hkes lower he carry rade probables. Ths s conssen wh he expecaons ha he new nformaon ha s lkely o lead o an apprecaon of he USD agans he JPY wll ncrease reurns from curren carry rade posons where he JPY s a fundng currency. The pre-gfc sample esmaons are repored n Table 6B. RV s sll negave and sgnfcan, however, NumTrade s no longer sgnfcan n any of he specfcaon. As n he full sample, none of he Japanese news s sgnfcan and he wo US news, Real sales growh and FOMC decsons are posve and sgnfcan. The pos-gfc sample esmaons show somewha dfferen resuls. The carry rade regme probables dd no respond o RV, however, NumTrade and OF are negave and sgnfcan. The negave OF coeffcen suggess ha as here are more buy han sell JPY rades (hence an upward pressure on he JPY), he resulng expecaon of he JPY apprecaon would render he JPY carry rades (JPY as a fundng currency) less profable and hence lower carry rade probables. Ths s oppose o he role OF plays for he AUD as an nvesmen currency. Unlke he pre-gfc sample, we now have some Japanese macroeconomc news ha are sgnfcan. The unexpeced ncrease n merchandse orders and Tanken mprovemens lower he probables. Snce hese news are 22

24 lkely o apprecae he JPY agans he USD he aracveness of he JPY as a fundng currency dmnshes. In addon he Japanese news nensy varable s negave and sgnfcan suggesng ha he scheduled nformaon arrval n Japan, regardless of news conens, lowered carry rade probables. Ths s smlar o he AUD news nensy varable ha shows a sgnfcan negave nfluence n all hree samples. The weekly esmaons resuls are presened n Table 7. RV s no sgnfcan n any of he sample whch s a deparure from he daly resuls. NumTrade s negave and sgnfcan n he whole and he pre-gfc samples, whereas OF s sgnfcan only n he pos-gfc sample. FuPos, whch measures he amoun of speculaon n he JPY fuures marke, s negave and sgnfcan n all samples consdered. The negave sgn s n lne wh expecaon ha ne long poson beng assocaed wh lower carry rade probables as a fuure JPY apprecaon s expeced. The Japanese news nensy varable s now sgnfcan and posve whch s oppose o he resul found for daly horzon. The accumulaon of scheduled announcemen evens over a week apparenly conrbued o he JPY carry rades. In sum, here are sgnfcan me varyng mpac of he deermnans of he JPY carry rades. A drec measure of he JPY volaly, RV, s sgnfcan only durng he pre-gfc sample, whereas NumTrade, as a measure of rade volume, has a sgnfcan mpac only durng he pos-gfc sample. In addon, OF s sgnfcan only n he laer subsample. There s also a shf n he mporance of macroeconomc news. In general, hose macroeconomc news ha pon o a fuure apprecaon of he USD agans JPY (unexpecedly hgher real sales growh and unexpeced Fed raes ncrease n he US, and lower han expeced machne orders and worse han expeced Tanken survey resuls n Japan) ncrease he JPY carry rade probables. However, he US news s sgnfcan only n he pre-gfc sample and he Japanese news maer only n he pos-gfc sample. 23

25 4. Concluson In hs paper we nvesgaed he me seres characerscs of carry rade regme probables of major currences over a perod 2 Jan 1999 o 31 Dec 2013 a daly and weekly nvesmen horzons. As a frs sep we nvesgaed he carry rades ha nvolve he USD and also cross currences wh a Markov regme shfng mehodology. We fnd ha here s srong evdence for carry rades for he AUD, EUR and JPY a daly horzon. Alhough boh he AUD and EUR show smlar paerns of me varaons n carry rade regme probables, he AUD was more lkely o say n a carry rade regme han he EUR. In general, carry rades are revered durng he varous epsodes of fnancal marke urmol such as he perod surroundng 9/11 n 2001, he GFC perod of and he Eurozone crss perod of The carry rade probables for he JPY s less sragh forward o nerpre, however he GFC perod shows a endency of lower carry rade probables. In he second sage of analyses, we conduced dealed nvesgaons on he deermnans of he AUD and JPY carry rades. For deermnans, we consdered a ls of foregn exchange marke acvy relaed varables for boh daly and weekly horzons. In addon, we examned he role of macroeconomc news varables from Ausrala and he US for he AUD carry rade nvesgaons, and from Japan and he US for he JPY for daly horzons. For weekly horzon nvesgaons we examned he role of ne long fuures posons on he AUD and JPY, whch ac as a proxy for he marke s assessmen on he fuure movemens of he currences. For daly horzon, we fnd ha here s a sgnfcan dfference n responses of he regme probables o hese deermnans beween he pre- and pos GFC perods for boh AUD and JPY carry rades. Durng he pre-gfc perod, carry rade regme probables are sgnfcanly lower n response o hgher realzed volaly of he USD/AUD exchange rae, number of rades, unexpeced nflaon and unexpeced unemploymen announcemens n 24

26 Ausrala. The carry rade probables are sgnfcanly hgher when order flows are posve (more buyer han seller naled rade of AUD) and when he RBA unexpecedly ncreased neres raes. For he JPY, he carry rade probables are sgnfcanly lower when realzed volaly s hgh and he probables are lower when he US unexpecedly rases he Fed funds rae and when unexpecedly hgh real sales growh s announced n he US. On he oher hand, he pos-gfc perod repors a sgnfcan deparure from he pre- GFC relaonshps we repor. For he AUD carry rades, almos all of he deermnans are nsgnfcan. For he JPY, he carry rade probables no longer responds o he JPY volaly, however, reacs o rade volume and order flows. In addon, only he Japanese macroeconomc news maer. For weekly horzon, we fnd ha for he AUD carry rades he marke acvy varables are also more nfluenal n he Pre-GFC perod. In addon, realzed skewness, order flow and ne long fuures posons on he AUD have a posve nfluence on he carry rade probables. For he JPY, speculave fuures posons on he currency maers n boh samples, however, dfferen combnaons of deermnans are relevan for each subsample. The nvesgaon resuls have sgnfcan mplcaons for marke parcpans and polcy makers who need o beer undersand he facors ha explan he me varyng naure of currency carry rade probables. 25

27 References Anzun, A., Fornar, F., Macroeconomc deermnans of carry rade acvy. Revew of Inernaonal Economcs 20, Balle, R.T., Chang, S.S., Carry rades, momenum radng and he forward premum anomaly. Journal of Fnancal Markes 14, Baksh, G., Panayoov, G., Predcably of currency carry rades and asse prcng mplcaons. Journal of Fnancal Economcs 110, Balduzz, P., Elon, E.J., Green, T.C., Economc News and Bond Prces: Evdence from he U.S. Treasury Marke. Journal of Fnancal and Quanave Analyss 36, Brunnermeer, M.K., Nagel, S., Pedersen, L.H., Carry rades and currency crashes, NBER Workng Paper, No ed, pp Burnsde, C., Echenbaum, M., Kleshchelsk, I., Rebelo, S., The reurns o currency speculaon, NBER Workng Paper. Burnsde, C., Echenbaum, M., Rebelo, S., Carry rade: The gans of dversfcaon. Journal of he European Economc Assocaon 6, Cenedese, G., Sarno, L., Tsakas, I., Foregn exchange rsk and he predcably of carry rade reurns. Journal of Bankng and Fnance 42, Chrsansen, C., Ranaldo, A., Söderlnd, P., The me-varyng sysemac rsk of carry rade sraeges. Journal of Fnancal and Quanave Analyss 46, Cheung, Y.L., Cheung, Y.W., He, A.W.W., Yen carry rades and sock reurns n arge currency counres. Japan and he World Economy 24, Colaveccho, R., Trackng he Yen carry rade: evdence from a regme swchng approach, Avalable a SSRN: hp://ssrn.com/absrac= Couder, V., Mgnon, V., The "forward premum puzzle" and he soveregn defaul rsk. Journal of Inernaonal Money and Fnance 32, Das, S., Kadapakkam, P.R., Tse, Y., Is carry-rade a vable alernave asse class? Journal of Inernaonal Fnancal Markes, Insuons and Money 24, Dobrynskaya, V., Downsde marke rsk of carry rades. Revew of Fnance 18, Fong, W.M., Fooprns n he marke: Hedge funds and he carry rade. Journal of Inernaonal Money and Fnance 33, Fung, H.G., Tse, Y., Zhao, L., Are sock markes n Asa relaed o carry rade? Pacfc Basn Fnance Journal 25, Jurek, J.W., Crash-neural currency carry rades. Journal of Fnancal Economcs 113,

28 Hamlon, J.D., Tme seres analyss. Prnceon unversy press, Prnceon. Huchson, M. and Sushko, V., Impac of macro-economc surprses on carry rade acvy, Journal of Bankng and Fnance 37(4), Ichue, H., Koyama, K., Regme swches n exchange rae volaly and uncovered neres pary. Journal of Inernaonal Money and Fnance 30, Lee, H.C., Chang, S.L., Spllovers of currency carry rade reurns, marke rsk senmen, and U.S. marke reurns. Norh Amercan Journal of Economcs and Fnance 26, Lusg, H., Roussanov, N. and Verdelhan, A., 2014, Counercyclcal currency rsk prema, Journal of Fnancal Economcs 111, Menkhoff, L., Sarno, L., Schmelng, M., Schrmpf, A., Carry Trades and Global Foregn Exchange Volaly. Journal of Fnance 67, Mollck, A.V., Assefa, T.A., Carry-rades on he yen and he Swss franc: are hey dfferen? Journal of Economcs and Fnance, Pelomäk, J., The performance of currency hedge funds and he yen/usd carry rade. Inernaonal Journal of Fnance and Economcs 16, Tse, Y., Zhao, L., The relaonshp beween currency carry rades and U.S. socks. Journal of Fuures Markes 32,

29 Fgure 1: Daly carry rade varables A: (USD) - (AUD) 8 3 A : (U SD) - (JPY ) B: USD/AUD Exchange rae B: USD/JPY Exchange rae C: AUD Carry Trade Regme Probables C: JPY Carry Trade Regme Probables A: (USD) - (EUR) A : (U SD) - (G BP) B: USD/EUR Exch an ge rae B: USD/GBP Exch an ge rae C: EUR Carry Trade Regme Probables C: GBP Carry Trade Regme Probables

30 Fgure 2: Weekly carry rade varables A: (USD) - (AUD) A: (USD) - (JPY) B: USD/AUD Exchange rae B: USD/JPY Exchange rae C: AUD Carry Trade Regme Probables C: JPY Carry Trade Regme Probables A: (USD) - (EUR) 2 4A: (USD) - (GBP) B: USD/EUR Exchange rae B: USD/GBP Exchange rae C: EUR Carry Trade Regme Probables C: GBP Carry Trade Regme Probables