Currency Carry Trades: The Role of Macroeconomic News and Futures Market Speculation
The Journal of Futures Markets, Vol. 36, No. 11, 1076–1107 (2016)
45 Pages Posted: 5 Mar 2018
Date Written: 2016
We investigate carry trade opportunities in major currencies against the US Dollar over the period 2 Jan 1999 to 31 Dec 2012. There is evidence of significant Australian Dollar (AUD), Euro and Japanese Yen (JPY) carry trades during non-crisis periods. The AUD (JPY) was an investment (a funding) currency, and the Euro was both. However, cross currency carry trades were not present. For the AUD and JPY, we find that carry trades were more likely with low volatility and volume. Macroeconomic news that appreciate (depreciate) the AUD (the JPY) also stimulated the AUD (the JPY) carry trades. However, there is no evidence of meaningful and consistent impact of macroeconomic news on the EUR carry trades. For weekly horizon investigations, we find that net long futures positions in the AUD promoted carry trades in the AUD and JPY. However, net long positions in the JPY only managed to reduce JPY carry trade probability.
Keywords: Currency Carry Trade, Markov Regime Shifting, Macroeconomic News, Order Flow, Speculative Futures Positions
JEL Classification: E44, F31, G15
Suggested Citation: Suggested Citation