“The global financial crisis of 2008 had a significant impact on the carry trade, which is a trading strategy that involves borrowing money in a low-interest-rate currency and investing it in a higher-yielding currency to profit from the difference in interest rates.
During the years leading up to the financial crisis, many investors and financial institutions took advantage of the carry trade to earn higher returns on their investments. However, when the crisis hit, the value of many higher-yielding currencies plummeted as investors fled to safer assets such as the U.S. dollar, Swiss franc, and Japanese yen. This caused many carry trades to unwind, as investors rushed to sell their higher-yielding currencies and repay their loans in lower-yielding currencies, leading to sharp movements in currency markets.
The carry trade was also affected by the liquidity crunch that followed the crisis, as financial institutions became reluctant to lend money to each other and to investors. This made it harder for investors to borrow money at low interest rates and invest in higher-yielding currencies, further exacerbating the unwinding of carry trades.
Overall, the global financial crisis had a significant impact on the carry trade, highlighting the risks and vulnerabilities of this trading strategy, particularly in times of market turbulence and uncertainty.”
Sourced from Chat GPT, assessed by Sean Lee.
Postscript: This article may have all the right words but it doesn’t convey the feeling at the time, as investors tried to dump positions which had been built up over years, in a frenzied few hours. I still remember AUD/JPY falling 10% in a matter of minutes in early morning Asian trade. Ah, the good old days, as long as you weren’t on the wrong side!