Traders take advantage of HIBOR rates drop to adopt carry trading strategy

The recent drop in HIBOR rates has renewed interest in the long-term opportunities for carry trading. Carry trading is a practice in forex trading where traders look to earn income from the differentials in interest rates. The gap between HIBOR and LIBOR rates has created a carry trade opportunity.

HIBOR rates drop triggers interest in carry trading

Despite carry trading being a popular strategy, it also carries a significant level of risk. The global economy and the market conditions have been volatile, with many brokers assessing whether they can continue using carry trading.

The HIBOR plunge has presented a good trading opportunity, but going by past trading activities, the trading window is only open for a short time. In carry trading, a forex trader borrows money in a currency with low interest rates and invests the money in a currency with high interest rates.

The objective behind this trading strategy is to earn from the disparity in interest rates. The strategy applies to bullish and bearish markets, making it a versatile trading strategy. This trading strategy can be useful to brokers during periods of recession.

However, a trader must identify an opportunity to use this strategy. The HIBOR rate witnessed a notable drop, which has widened the spread between HIBOR and LIBOR to the highest level since 2007.

Carry trading is an appealing strategy to investors that want to avoid risk during periods of recessions and low volatility because there is potential to make consistent returns while lowering exposure to market volatility. During periods of recession, an investor can look for low-risk investments to safeguard their capital.

Carry trades present a solution when the interest rate differential is used to offset the losses from price movements within the forex market. Additionally, carry trading can offer notable returns in an ecosystem where yields are significantly low, which gives stability to investors looking to avoid risk.

Risks in carry trading

There are multiple benefits from carry trading, but the strategy also carries a significant level of risk. One of the greatest risks is currency devaluation, where a drop in the borrowed currency could result in significant losses. Additionally, the changes made to central bank guidelines and those in the global economy could affect interest rates.

Other risks also stem from macroeconomic and geopolitical events that threaten to affect the long-term development rate in the short term. However, a trader can mitigate the risks using a judgment call to choose the countries with a stable environment for the trading currency pairs.

Hong Kong is already taking measures to prevent a drop in currency value. An increase in the currency of autonomous jurisdictions could result in significant effects on the bets made by short sellers.

However, a forced intervention could affect the economy. If the Hong Kong Monetary Authority continues making interventions in the forex market, there could be an impact on the city’s struggling economy, which limits the extent to which the regulatory body can go.