The global financial crisis this month brought down the curtain on one of the longest-running investment plays of the decade - the interest rate carry trade between the Japanese yen and the Australian dollar.
But with interest rate differentials between the two currencies remaining a temptation at above 6 per cent, currency punters could be lured back to the market, analysts said.
Underpinned by an unbroken 16-year period of economic expansion and a decade-long explosion of commodity exports to fuel China's economic growth, the Australian dollar has long been a popular punt among currency investors, who borrowed Japanese yen at rates of interest that were close to zero and placed the proceeds in high-yielding Australian dollar deposits.
With three-month yen rates at just 1 per cent this month and corresponding Australian rates at 7 per cent, the trade continued to present significant and reasonably safe returns as long as the commodities boom underpinned a stable and strengthening exchange rate for the Australian dollar.
But the heightened risk aversion triggered by dramatic events on global financial markets triggered an unwinding of these carry trades in recent weeks, and they should now be viewed with caution, warned Chiang Siew Kay, head of foreign exchange, Asia-Pacific, at Citi Global Wealth Management.
'In times of a well-functioning market, such high-yield crosses do very well for investors,' said Singapore-based Mr Chiang, who is also head of investment counselling for Citi's global wealth management business in South Asia.
'But in the risk-averse climate we have now entered, the crosses have been liquidated, and this saw the 'Ozzie' collapse from a high of just above 98 US cents on July 15 to touch a low of just 78 US cents or so last week.'
