This week we were up by 49 pips in capital gain and nearly $150 on interest received.
We closed a short position in the EUR/USD to reduce our exposure to next Thursdays ECB meeting. The ECB is widely expected to hold its key interest rate at 3.75 percent but a lot of uncertainty remains regarding the next ECB rate change. The euro zone inflation remains high and the European Central Bank will do what is necessary to ensure stable prices, Jean Claude Trichet said in a interview published on Monday
We also initiated a short position in the Japanese yen against the US dollar. The Bank of Japan ended its monetary policy meeting on Monday and the central bank members unanimously decided to keep rates unchanged.
What Are We Currently Long?
Interest Rate Ranking
Libor Rates NZD 7.83% AUD 6.40% GBP 5.54% HKD 4.14% CHF 2.28% JPY 0.61%
The Interest rate used to benchmark the currency basket is the 3 months Libor rate
Weekly Profit & Loss Analysis:
Profit & Loss ( 3/27/2007 to 4/10/2007 )
0.6485 + 103 pips $30.80 LONG AUD/USD 0.7460 + 121 pips $11.90 LONG GBP/USD 1.8965 - 16 pips $2.80 SHORT EUR/USD 1.3501 - 110 pips $39.20 LONG USD/CHF 1.1854 - 64 pips $58.10 LONG USD/HKD 7.7899 15 pips $9.10
The Interest Received is the dollar amount received per each 100K lot left open at 5:00 PM ET.
Average Annual Excess Return: 11.04%
Annualized Standard Deviation: 8.99%
Sharpe Ratio: 1.23
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.
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.
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.