An unexpected unwinding of carry trades triggered by worries about the health of the US subprime market propelled the highly borrowed Japanese yen against the world most liquid currencies.
As a result, this week the DailyFX Carry Trade Basket fell by nearly 710 pips. The portfolio biggest losses were taken in the long positions we hold both in the Sterling (160 pips) and Australian dollar (273 pips) and in the short position we have in the USD/JPY (258 pips). Nonetheless, some of our losses were offset by nearly $120 received on interest payments.
This week performance was terrible but inline with our expectations. In fact, drawdowns like this did happen in the past as shown by the equity curve. However, the strategy has always recovered in the following days of these major sell-offs.
What Are We Currently Long?
Changes Since last week
§ On 6/15/2007, we closed a long position in the New Zealand dollar, to minimize the impact of more RBNZ interventions