§ This week we received nearly $150 on interest payments but were down by 105 pips in capital losses.
§ The bulk of our loss was taken in the Australian dollar as surprisingly low inflation reduced the chance for an interest rate hike when the Reserve Bank of Australia meets next week.
§ The collapse in the Aussie makes the kiwi carry trade particularly vulnerable and tomorrows RBNZ Rate decision is an event risk we dont want to trade. We will probably resume the kiwi trade if the rate decision plays as expected but for the time being we decided to close the long position in the NZD/USD.
§ The rest of the portfolio remains well balanced and no additional changes were done.
What Are We Currently Long?
AUD/USD
GBP/USD
USD/CHF
USD/HKD
USD/JPY
Changes Since Last Week
Closed the NZD/USD Long Position
<SPAN style=“FONT-SIZE: 9pt; FONT-FAMILY: Arial”>[B][B] Interest Rate Ranking
Interest rates
High Yielders
Low Yielders
3 Month
Libor Rates
AUD
6.30%
GBP
5.64%
HKD
4.12%
CHF
2.30%
JPY
0.62%
The Interest rate used to benchmark the currency basket is the 3 months Libor rate
[/B]
Last Weeks Profit & Loss
Open Positions
Stop Price
Profit & Loss ( 4/17/2007 to 4/24/2007 )
Capital Gains
Interest Received
LONG NZD/USD
0.6485
+ 23 pips
$30.80
LONG AUD/USD
0.7460
- 41 pips
$11.90
LONG GBP/USD
1.8965
+ 125 pips
$2.80
LONG USD/JPY
1.3501
- 128 pips
$39.20
LONG USD/CHF
1.1854
- 115 pips
$58.10
LONG USD/HKD
7.7899
+ 31 pips
$9.10
The Interest Received is the dollar amount received per each 100K lot left open at 5:00 PM ET.
Additional Information
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
What is Carry Trade
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.
Protective Stop-Loss
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.
Position Sizing
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.
[/B]