During this week the Carry Trade Basket fell by nearly 247 pips. The portfolio biggest losses were taken in the long positions we held in the Sterling (168 pips), Australian dollar (107 pips) and Hong Kong dollar (84 pips).
However, it could have been worst if we weren?t well diversified. Some of our losses were offset by gains in the short positions we held in the Swiss Franc (+80 pips), Japanese yen (+32 pips) and by nearly $120 received on interest payments.
The losses have been quite big but the carry portfolio continues to perform inline with our expectations. Over the last 20 years, carry trade has never dropped more than 13% and the strategy has always recovered in the following months of these major sell-offs. Good Luck with your Trading!
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[B]What Are We Currently Long?[/B]
AUD/USD
GBP/USD
USD/CHF
USD/HKD
USD/JPY
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[B]Changes Since last week[/B]
On 6/15/2007, we closed a long position in the New Zealand dollar, to minimize the impact of more RBNZ interventions
The interest Rate differential between the U.S. and Japan for rates with one year maturity seems to be stabilizing. As a result, we expect Carry Trade to perform well in the months ahead.
[B]Additional Information[/B][B][/B]
In an ever changing world, making profitable carry trades* (definition below) are not as easy as they use to be. Therefore we have created a dynamic carry basket that changes when the monetary policy outlook for a central bank changes or if there is significant event risk ahead. Follow the performance of the DailyFX Dynamic Carry Trade Basket
[B]What is Carry Trade[/B]
All that is needed to understand the carry trade concept is a basic knowledge of foreign exchange and interest rates differentials. Money shifts from around the world in seek of the highest yield and the benefit of trading currencies is that you are dealing with countries that have interest rates, which are charged or received every single day. If you are positioned on the side of positive carry, you have the right to earn that interest, which can be quite lucrative over time.
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[B]Protective Stop-Loss[/B]
Substantial gains made from interest rate differentials provide undeniable evidence that the carry trade strategy has been very successful over the past few years. Still, this strategy involves significant risks and an adequate protective stop is required. We are using a protective stop-loss equivalent to five times the average true range.
[B]Position Sizing[/B]
Our position size varies according to each currency volatility. Generally, the more volatile the currency is, the fewer lots we trade. For example, let’s assume you have $10,000 and you are trading 10K lots, you decide to limit your risk per trade to 3% or $300 and the 90 days average true range for the EURUSD is 100 pips. In this case, if you go long EUR/USD you could buy 3 lots, since ($10000 * 3%) divided by (0.0100*10K) = 3 lots. In case the final result is not an integer you should always rounded it down to limit your exposure.