Wednesday, May 28, 2008

Want a Carry Trade? Buy the Dollar! IFCN Wk 25 -Wed- Equity: $712.05

Current “carry trade” examples:
  1. Buying the Usd/Chf: Interest rate differential is 2.75%= $ 6.31/day/100,000 unit position.
  2. Buying the Usd/Jpy: Interest rate differential is 4.75% = $11.04/day/100,000 unit position.
This means, if you can hold a 100,000 unit position of Usd/Jpy for a WHOLE YEAR using $4,000.00 margin (with some firms you could hold that position with $2K or some even $1K) you could gain over $4,029 in interest alone, generating a 100% return. Any directional gain on the contract would be bonus, while any move counter to the long position would cost you $10/pip.

When carry trades work, they are a terrific way to virtually mint money. Primarily hedge funds mine this opportunity.

Do you think the dollar is going to hold this area and/or move higher for the next year?  If so, you have a fantastic opportunity facing you right now.  (But, what if it doesn't gain all that much, or hold that long?  What indication will you use to realize that the dollar is done going up?)

The dollar is making a lot of gains over weaker major currencies right now due in part to commodities (most of which are dollar denominated, like oil) dropping in price – and, the major currencies themselves being ridiculously overdone. Especially when the problems in these developed countries are just becoming identified, while the US is beginning to stabilize.

We can see many possibilities of carry trades beginning to “work”. In addition to the pairs mentioned above, the GBP/JPY and EUR/JPY and EUR/CHF are all viable with the current trends and economic conditions. Expect to hear much more in the future about them.  Be careful.

T-Bonds and eurodollar interest rate contracts have been falling demonstrably this week. That indicates smart money is thinking that the US is going to have higher interest rates in the near future and that makes the dollar more competitive. And something that big funds finally want to own versus the other currencies they've been carrying.

I will make one solitary point, and those who get it – get it. Those who don't yet, will eventually, when they are poorer.

When the US Fed can't maintain a low interest field of battle any longer, it being the only agency on earth who has the clout and sheer money-ballooning ability to do it, the game of artificial low interest rates in the world is over.

The game will then be leveraging against whoever has the cheapest money to spread against.

The best way of profiting long term from this whole mess is by learning how to short bonds and other interest rate instruments with low risk methods. Take a look at the December 2010 Eurodollar weekly chart below. (As prices fall it indicates higher anticipated interest rates. Look out below!)


The following 3 FirstStrike trades this week are still in play- and they are all “carry trades” too.
  • Gbp/Jpy: long @ 205.53, stop 204.63. (90 pip risk) Trade in progress.
  • Usd/Chf: long @ 1.0311, stop 1.0251, trade in progress.
  • Usd/Jpy: long @ 103.82, stop 103.22, trade in progress.

It is nice to see some forward progress this week.

Current equity is $712.05.

Joel Rensink

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