Carry Trades and Bond Yields
See Exhibit 6.12, the chart of euro/Japanese yen from 2003 to 2006. What is evident is that within a three-year period, euro/Japanese yen moved about 2000 pips. This reflects not only a stable economic environment that is conducive for carry trades to earn its yield, but carry trades won't have the same volatile movements as the euro/U.S. dollar and opposite dollar pairs.
Carry trades follow the underlying pairs rather than the straight connection to bonds and yields. That connection of movements can only reflect in economic conditions and interest rates. Stable economic environments bring with it slow but certain trends for carry trades. Uncertain or erratic economic conditions and interest rates bring market volatility. ...
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