DailyFX Dynamic Carry Trade Basket: 218 pips Gain

  •      This week  we were up by 218 pips in value, accumulated nearly $150 on interest payments  and four of our six trades were profitable.
  •      Still, the  week didn?t start in the best way for us. On Monday, June 11th, the  Reserve Bank of New Zealand  intervened in the foreign exchange market to sell the New Zealand Dollar. Alan  Bollard, the RBNZ Governor justified this action by saying that  "As stated in our June Monetary Policy  Statement, we regard current levels of the exchange rate as exceptional and  unjustified in terms of the economic fundamentals". We don?t think we will have  a massive carry trade unwind in the weeks ahead but the most likely increase on  volatility, on speculation of further RBNZ interventions, make the NZD dollar a  bad trade to take at this moment. As a result of this we decided to remove the  New  Zealand dollar from our carry trade  basket.
  •      Yet, our  carry trade portfolio continues well supported by 5 different trades and the  current market environment, with volatility close to a record low, continues to  push the markets in our favor. Good Luck in Your Trading!

[B]What Are We Currently Long?[/B]


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[B]Interest Rate Ranking[/B]
[B]Interest rates[/B]
[B]High Yielders[/B]
[B]Low Yielders[/B]
3 Month
Libor Rates

The Interest rate used to benchmark the currency basket is the 3 months Libor rate

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[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.
[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.