Dynamic Carry Trade Basket

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.

What Are We Currently Long?






What Are We Currently Short?


Trades since last week

• The G7 meeting represents a significant risk and we cut back in our USD/JPY long position
• A rebound in commodity prices should help the high Yielders Australian and New Zealand dollar
• We initiated a short position in the Hong Kong dollar with a stop at 7.550

Weekly Commentary
During this week, the Japanese yen staged an impressive recovery amid speculation that its long term weakness could be discussed at the next weekend’s G7 meeting. On face of this risk, we decided to adjust our portfolio by replacing a long position in the USD/JPY for a long position in the USD/HKD. In fact, the Japanese yen has been the strongest performing currency over the past week on the back of concerns over the upcoming Finance Ministers and Central Bankers meeting. THE USDJPY is down 1.2 percent for the week and more important, the NZDJPY collapsed 2.9 percent in just five days. According to Kathy Lien, DailyFX Chief Currency Strategist, “the reason why we have already seen liquidation in Japanese Yen shorts ahead of the meeting is because the G7 truly has the power to trigger major market movements. In the month following the April 2006 G7 finance ministers meeting, where the above comment on China was added, USD/JPY dropped from 118 to a low of 109”. For more details, please click here. Additionally, of some concern is the recent exaggeration of short positioning in yen futures contracts with the difference between speculative and commercial positioning close to the largest on record. Speculators increased shorts for the 7th week in a row to set a new record for speculative short contracts at 173,005. Nevertheless, the current market environment with implied volatilities at historical lows continues to favor several carry trade opportunities and as the G7 effect fades we expect to continue to selling short the Japanese yen. Additionally, we are carefully watching the high Yielders Australian and New Zealand dollar which are all weaker across the board. Still, we think a rebound in commodity prices should slowdown the selling pressure in these currencies and we decided to maintain our long positions.

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.