§ This week we made 238 pips and 5 of our 6 trades were profitable. Is this the Carry Trade Renascence?
§ Most of the gains were done on the sterling (131 pips) and in the Australian dollar (44 pips)
§ Because we are positioned on the side of positive carry we collected an extra $151 in interest.
§ The Tankan report showed a decline in Japanese business confidence and the BoJ is now widely expected to keep its benchmark interest rate unchanged at 0.5 percent. This situation will open a window of opportunity and we invite you to take a look to next weeks DailyFX Carry Trade Basket report because we plan to initiate a new long position in the USD/JPY.
What Are We Currently Long?
What Are We Currently Short?
The Interest rate used to benchmark the currency basket is the 3 months Libor rate
Profit & Loss ( 3/27/2007 to 4/3/2007 )
The Interest Received is the dollar amount received per each 100K lot left open at 5:00 PM ET.
Average Annual Excess Return: 10.94%
Annualized Standard Deviation: 8.99%
Sharpe Ratio: 1.22
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.