What happened to the carry trade?

Remember when investors would borrow in Japanese yen, at low interest rates, to invest in higher-yielding currencies such as the Australian and Kiwi dollars?  For a long time it seemed like free money was just sitting there on the table.

Well, two days ago the Australian dollar dropped 12 percent against the yen and the Kiwi dollar dropped ten percent, both in a single day.  Calculate that return on a yearly basis and you can see the problem; toss in leverage if you wish.

Here is one article on the destruction of the carry trade.  I suspect they are not planning on awarding the Nobel Prize this year to Eugene Fama (is Bob Shiller a better bet?), but in fact the selection of Fama, despite his association with the "efficient markets" idea, would be quite timely.


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