Carry trades explain FX response to rate hikes – BIS bulletin
Value of funding currencies surges after surprise tightening as investors unwind positions, study shows
Carry trades play an important role in explaining how exchange rates respond to monetary policy decisions, research from the Bank for International Settlements shows.
In a bulletin published on May 6, Ryan Niladri Banerjee, Lena Boneva, Gabor Pinter and Vladyslav Sushko explore how currencies that fund leveraged carry trades exhibit significant volatility when central banks unexpectedly tighten policy.
In a carry trade, speculators such as hedge funds borrow in cheap currencies – such as the yen
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