Dynamic Carry Trade Basket: NZD/JPY Interest Rate Differential Widens to 738 bps

§ This week our carry trade basket accumulated nearly $150 on interest payments but was relatively unchanged in value.
§ The most profitable trade was the long position in the AUDUSD with 86 pips gain.
§ The biggest loss was taken the Sterling with a 79 pips drop.
§ We are concerned with the performance of the US dollar against the Hong Kong dollar but decided not to make any change in the components of the carry trade basket until we see further economic data that confirms the current price action.
§ The 3 month interest rate differential between New Zealand and Japan is now close to 738 basis points and with the market pricing another RBNZ rate hike, the NZD/JPY could see more gains in the week ahead.

What Are We Currently Long?


Changes Since Last Week
No chances were done in the basket since last week

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.