on strengthening from 0.80 to 1.00 against, or on par with, the
U.S. currency. This 40 percent increase in the looney made it
very easy for American farmers and manufacturers to take
business from their Canadian counterparts because the cost of
American feed and products was so much lower compared
with the Canadian than it had been just three or four years earlier.
As business shifted away from Canada, the looney turned
and was sold off, and the Canadian government cut interest
rates accordingly. Like a pendulum that has swung too far, it
can be said that the weight of a stronger currency can cause its
value to swing lower. It is this characteristic of a free enterprise
system with floating currency values that ideally ensures that
the best products and services at the most competitive prices
are what will set economic standards going forward, not political
or nationalistic considerations.
Interest Rates and the Carry Trade
As we saw with regard to the effects the overall business environment
has on currencies, interest rates play a key role. One
way to take advantage of interest rate differentials between
countries is by buying a currency with a higher interest rate and
collecting that interest and then selling a currency with a lower
interest rate; when the short position pays the interest rate, this
is called the carry trade. In times of global economic expansion,
investors and traders make money by using this strategy.
A typical example from a couple of years ago would be
buying U.S. dollars and selling Japanese yen; in trading parlance
this is known as going long USDJPY. If interest rates
on strengthening from 0.80 to 1.00 against, or on par with, the
U.S. currency. This 40 percent increase in the looney made it
very easy for American farmers and manufacturers to take
business from their Canadian counterparts because the cost of
American feed and products was so much lower compared
with the Canadian than it had been just three or four years earlier.
As business shifted away from Canada, the looney turned
and was sold off, and the Canadian government cut interest
rates accordingly. Like a pendulum that has swung too far, it
can be said that the weight of a stronger currency can cause its
value to swing lower. It is this characteristic of a free enterprise
system with floating currency values that ideally ensures that
the best products and services at the most competitive prices
are what will set economic standards going forward, not political
or nationalistic considerations.
Interest Rates and the Carry Trade
As we saw with regard to the effects the overall business environment
has on currencies, interest rates play a key role. One
way to take advantage of interest rate differentials between
countries is by buying a currency with a higher interest rate and
collecting that interest and then selling a currency with a lower
interest rate; when the short position pays the interest rate, this
is called the carry trade. In times of global economic expansion,
investors and traders make money by using this strategy.
A typical example from a couple of years ago would be
buying U.S. dollars and selling Japanese yen; in trading parlance
this is known as going long USDJPY. If interest rates
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