One of the most important and simultaneously intangible aspects of the huge wash of money rushing around the world is the carry trade. At its most basic, it is an enormously simple, effective, and fast way of making money.
The first risk is that the interest rate differential will be wiped out by a decline in the currency of the country you invest in. For example, Turkey’s three-month deposit rate currently stands at 28%, while the same rate in the US about 2.6%. So if you invest, say, one billion dollars, in three months you will make a profit of $254-million.
The danger of interest rates differences becoming narrower has been what has been restricting the carry trade for the past year or so. But recently, it seems, US interest rates are unlikely to change and may even go down. Emerging market interest rates, too, have been pretty steady. Currencies have been trading in a range, and some emerging market currencies have even been strengthening. All of this is just heaven for the carry trade.
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