The carry trade was on the rebound last week; but the momentum behind this positive move is still very circumspect. Conditions in the credit and broad financial markets are still very shaky. Just this past Tuesday, the Federal Reserve auctioned another $30 billion in short term loans through its term auction facility program and received a cumulative bid of $58 billion from 66 banks. This certainly reflects a strong concern over the availability of liquidity at the highest levels. What’s more, at a meeting with central bank governors and finance ministers from the G7 this past week, a uniform cry was made over the state of the financial system and the looming burden from the subprime mortgage market. What’s more, there was a general forecast for further deterioration in the US economy - an outlook that directly threatens global growth, the demand for risky assets and more specifically the carry trade.</em>
[B]What Are We Currently Long?[/B]
NZD/USD
AUD/USD
GBP/USD
[I][I]Watch What the Fed Watches to stay ahead of the rest.[/I] [/I]
[B]Interest Rate Ranking[/B]
[B]Interest rates[/B] [B]High Yielders[/B] [B]Low Yielders[/B] 3 Month NZD AUD GBP CAD CHF JPY Libor Rates [B]8.83%[/B] [B]7.57%[/B] [B]5.61%[/B] [B]3.91%[/B] [B]2.66%[/B] [B]0.83%[/B]
The Interest rate used to benchmark the currency basket is the 3 months Libor rate
[B]Open Positions[/B] [B]Stop Price*[/B] [B]Profit & Loss ( 01/14/2007 to 2/13/2008 )[/B] [B]Capital Gains[/B] [B]Interest Received**[/B] LONG NZD/USD 0.65 - 26 pips $40 LONG AUD/USD 0.7650 - 5 pips $32 LONG GBP/USD 1.9000 +113 pips $44
[B] *Stop losses are activated when we have a weekly close below the specified stop level.[/B]
**The Interest Received is the dollar amount received per each 100K lot left open at 5:00 PM ET.
[B]Past Trades[/B] Nov-07 Stopped out in the long USD/JPY position in a weekly close bellow 114. Sep-07 Opened a long Position in the New Zealand dollar Sep-07 Closed long positions in both the Swiss franc and Hong Kong dollar (Stop losses were triggered) Jun-07 Closed a long position in the New Zealand dollar, to minimize the impact of more RBNZ interventions Apr-07 Opened a short Position in the yen following the recent lack of inflationary pressures in the Japanese economy Feb-07 Closed a short position in the Japanese yen after the BoJ increase of the overnight rate to 0.50 percent Jan-02 Opened long Positions in the NZDUSD, AUDUSD, GBPUSD, USDJPY, USDCHF, and USDHKD
[B]Additional Information[/B]
Making profitable carry trades 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.
[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. Stop losses are activated when we have a weekly close below the specified stop level.
[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.