I read somewhere about making a 6.25% return on the AUD/JPY currency pair. Could someone clarify it for me?

Question

I was reading an internet thread about investing, and someone talked about buying a currency pair with high income and low interest rates. It was said that AUD had a 6.25% rate (no idea what that means) and JPY had a 0% rate.

The post said that when you trade on the forgein exchange, you are margin lending, like shares (I don't know what margin lending is). It said you had a 98% LVR (again no idea).

Could someone clarify what this person meant, and also the elements of forgein exchange and jargon that I didn't understand?

Thanks very much.

Answer 1

A)In Forex terms, the currency pair you mentioned was the Australian Dollar (AUD) and the Japanese Yen (JPY). B) The 5.25% AUD rate is the current commercial interest rate in AU, and (approximately) 0% rate in Japan. C) If you buy/sell one of the pair against the other, a 6.25% return can be acheived (per minute, per hour, per day ???) D) The LVR (leveraged rate): If you put up $100 and were allowed (chose) to speculate $200 on this pair, that would be a 50% LVR. $100 to $300 would be 66.7% LVR. E) Thus the "borrowed" amounts to make up your 50% and 66.7% is the "margin lending"
Now, go to your library, and under the heading "Investments", you may find a book that (at your present level of understanding) will bore you silly. My advice to you: stay away from Forex trading until you can give someone a much better explanation than I have given you.

Answer 2

Well trading foreign currency usually involves margin trading(leverage).Unlike stocks Fx margin trading has more flexibility.
Most brokers offer 100x leverage(1 percent margin). Stocks allow 2x leverage(50 % margin)

Example 1 LOT (100,000 UNITS) Long Eur/USD using USD1,000.00 thats 100x leverage 100,000 divided by usd 1000.

6.25 percent is the LIBID ( London Interbank Bid rate) of aussie dollar - libid is the interest bank pay for the deposit of that currencies.
0.00 percent is the libor (London Interbank Offer rate) of the japanese yen- libor is the interest bank offer interest for loans on the interbank market.
In fx you always Pay libor rates and earn Libid rates.


Japan has low rates because of deflation in japan and slow economic growth. On the other hand Australia has high interest rate due to higher growth, rising commodity prices (exporter of commodity) and huge trade deficit.


The strategy is called carry trade. Say example Long AUD/JPY.
It implicitly means Buy AUD and Sell JPY or Lend in AUD and borrow in JPY.

You will earn money based on the interest rate differential between two currencies and if AUD appreciate against the Yen.

Interest rate is the cost of money it varies from different currencies.

100 x leverage is .01 margin to compute get the reciprocal of 100
50x leverage is 0.02 margin to compute get the reciprocal of 50

Example Long 1 million unit of GBP/USD and 50 x leverage your margin will be 20,000.00 USD.