POWER YEN
The carry trades start to fall, so you cash out. This means you remove your money from the Bank of Australia. Before you can bring your money home, you must repay your loan back to the Bank of Japan.
Since your loan is in yen, you need to exchange your Australian dollars for Japanese yen to repay your loan. You are now selling AUD and buying JPY. Selling AUD lowers the value of the Australian currency. Buying JPY raises the value of the Japanese currency.
As a consequence, if you live in the United States and make a profit on the pips from your AUD/JPY carry trade, you will also convert the extra yen into USD. This repatriation of profits back to the American economy can also raise the value of the greenback.
This is a great example of global money flow based on interest rates. So as you can see, interest rates are extremely important to currency traders. It’s what drives global money flow and creates long-term trends in the forex markets.
USD → JPY → AUD USD ← JPY ← AUD
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