High Yield Currencies Struggle on FX Market

November 20, 2008

Aussie, kiwi drop in currency tradingHigh yield currencies are struggling right now on the FX market. The Aussie and the kiwi — the down under currencies — are prime examples of what can happen in currency trading when risk aversion and global recession set in.

For the most part, high yield currencies are those that benefit when risk appetite is strong. Because they have a higher yield, lower yielding currencies are borrowed in order to fund their purchase. The forex trader can then make money on the difference in interest yields.

This maneuver is known as the carry trade, and it is considered risky. When confidence in the market is falling, such risky moves are the first abandoned, and high yielding currencies no longer benefit from them.

Aussie and kiwi are experiencing this in currency trading right now, and both have fallen quite far on the FX market since the beginning of the year.