The Sub Prime Crisis: Strange developments in Asian currency markets

(Ref: Wall Street Journal, August 20)

Strange developments are being reported in the Asian currency markets. These are related to the carry trade, a favourite strategy among forex dealers for the past few years. The carry trade consists of borrowing the low interest rate Yen, and selling it and investing in high interest rate currencies like the Aussie $ and the New Zealand $.
In the wake of the sub prime crisis, with many investors scrambling for liquidity, there has been unwinding of these positions. That means people have sold the Australian and New Zealand currencies and bought Yens and squared off their positions to book profits. Consequently, the Yen rose 9% against the Aussie Dollar last week.
Indeed, trading in these Asian currencies has become so one sided that traders have been struggling to find buyers. In Australia, the trading reached panic levels on 17th August. Because of illiquid positions in London and New York, the Reserve Bank of Australia had to intervene. This is the first time in 6 years that the Reserve Bank has intervened. The Bank has indicated that it is ready to act again if needed.