Is Currency Carry Trade worth investing?

What is Currency Carry Trade?
"A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used. " quoted from http://www.investopedia.com/terms/c/currencycarrytrade.asp

Value?
The value of this investment depend on the currency being used. Since most high interest currency belong to third world countries, their currency tend to be very unstable. For example Argentina which have an interest rate of 8.18%(at the time of this post) but due to it the 2014 Aug Default, no sane investor would consider getting this bond.

If the trader get the safer developed countries currency, the interest rate tend to be lower. So in order to get the same return as third world countries, the trader would need to leverage even more and so exposing themselves to higher risk due to uncertainty of exchange rates.

Liquidity?
Liquidity is not a concern for this type of investment due to that it is already in a form of currency. Unless you brought the currency as a form of exotic investment, liquidity would not be a concern.

Growth?
The growth of the carry trade depend on the country economy health. If the trader manage to enter during a economy boom, he will be earning from the increase valuation of the currency and the interest rate that it provide.

But due to the recent credit boom from multiple countries Quantitative easing, the cycle of boom and burst seem to be getting shorter and harder to predict. You can easily be holding on to a booming economy success but the next day be holding on to a junk.

High growth possibility due to the leveraging effect but also high risk of devaluation due to the leveraging effect.

Does it make good investment?
Due to the risk of leveraging and the uncertainty of exchange rates, this type of investment is closer to speculation. My conclusion is that leveraged Carry trade is not worth investing.

Comments

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