There are two things that you need to concern yourself when trading carry: direction of the underlying and general risk trends. First of all, you need to have USDJPY, GBPJPY or whatever pairs are in your basket rising in favor of the carry trade. But this is often interrupted by risk trends (something we have seen recently). If traders are trying to unwind their risky positions, the carry trade will be a victim as well since it requires low volatility and steady direction.

The VIX will measure the level of volatility in the currency market. When volatility is high, there is a greater chance that the increased activity will see the carry unwinding.

Few additional points to make. Try to diversify your basket. For example, don't have only exposure in short yen or long kiwi and pound. The more diversified your basket, the more closely it will follow carry and not falter when one or two pairs suffer a reversal on economic data or some other factor. Also, don't try to change or get in and out of your basket too often. All strategies have drawdowns, and when your out of the carry trade, you aren't collecting the yield differential.

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I believe the article that followed that graph had an article that explained current account deficits, and mercatilist thoughts. The article highlighted CHF and AUD one country has a current account deficit but a high int rate the other a CA surplus but a low int rate. There has been a long term appreciation of the AUD (puzzling), because macro textbooks say that the AUD should cut it's int rates in order to balance the current account. Will that happen, well as long as people still invest in the AUD NO, but when the RBA starts cutting look for traders to flee fast and for the trand to reverse.

Interesting point, but these are also trade weighted, so the trade conditions between any two economies will have little influence on exchange rates.

Also, this international economics axiom is based on the assumption that all variables area equal. This is clearly warped by the size of economies, technology, the difference between physical and investment flows and other conditions. In the long-run though (years and decades), this usually holds true.

This particular axiom holds true for almost all countries except the US because the USD has so many external ramifications. While countries like AUD and CHF do not have currencies that influence the rest of the world. In terms of size they are comprable. However the carry trade is a long term strategy so in terms of analyzing the CA it will take decades to adjust because capital movements occur instantaneously while goods movements lag. AUD CA will improve when the AUD depreciates or they invent cold fusion I'm betting on the depreciation.

The carry trade seems to be a bad idea at the moment do to all of the volatility and uncertainty surrounding the market. On basic carry trade ideas the NZD should be appreciating against the AUD which is definitely not the truth. The GBPJPY has been going in the opposite direction for months. Why, because of the uncertainty surrounding these high interest rate area countries. The BOE wants to cut rates but can’t because of inflationary concerns. NZD is facing an imminent recession, and with oil still at 145 it’s any ones guess where the markets will head. This all makes the carry trade a very dangerous strategy to undertake.

The key with carry trades is not the absolute level of interest rates but the direction of interest rates which is why the NZD is not appreciating against the AUD. Like you said, the NZD is facing a recession an as such we would far sooner see a rate cut than a rate hike from the RBNZ. Australia's economy on the other hand has been holding up well - which is keeping the Australian dollar near its 25 year highs.

Jun. 2008 CPI: Q1: 1.6 Y/Y:4.0 Tradeable: Q1: 2.3 Y/Y 4.8 Non-Tradeable: Q1: 0.9 Y/Y 3.4

The above numbers above indicate that inflation is high in New Zealand. Because they have an 8.7% current account deficit, New Zealand will be forced to import inflation. If the RBNZ cuts to foster growth then non-tradeable and tradeable inflation will rise. CPI in general is on the upside. I am guessing that the RBZD is perceived to be Dovish odd considering int rates are so high. Let me know what you think.

Like the situation in the US and UK, high interest rates are the only consideration for monetary policy decisions in New Zealand.

Though Bollard's mandate is to keep inflation in line, he also has to make sure its stable through the long-term - which is also a function of the economy's health. If consumers aren't spending and businesses activity is slowing, inflation is likely to be largely imported (as you suggested), but domestic policy makers can do anything to correct global price pressures - and certainly not through further taxing their own citizens with higher interest rates.

Bollard has said straight up that he expects to lower interest rates this year. One cut wouldn't reduce the carry in many of its pairings, but its what is in store beyond that that is keeping traders out of buying the kiwi.

Forgot to mention. Put the new Carry Trade article up on DailyFX.com.

The carry trade (and general risk appetite is in a precarious position). The index has pushed to a triple top to test whether a true trend change can hold water. On the other hand, market conditions figures like volatility and put interest have all marked sharp deteriorations - suggesting their is considerable fear of a dramatic drop in risk appetite.

We should have a direction within the week (just hope its not a slow pullback to create another frustrating range).

You want to make money on a trend right now? Direct your attention to a currency from a land known for hot weather, funny accents, and being way south of the equator. No, not South Africa... Australia.

The AUD is one of the only trending currencies right now, largely because they're one of the only ones in the world with a robust economy right now. I'm currently long on 5 different AUD pairs (with varying currencies), as well as the EURJPY. The best part? All of them, except for the AUDNZD, give you rollover. If rollover is crucial to you, then check out the AUDJPY.

Be very careful with the AUDUSD. It has had a huge run over the past 7 years - a reversal is likely. Trendline resistance held 2 weeks ago and the pair is now BELOW a year old support line. Speculative participation in the AUDUSD is extreme too. In other words, the decline will probably be violent because there will be a massive unwinding of positions.

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Interesting to see analysts growing more concerned about CDO and debt-related losses at big financial firms and news from Merrill of a massive write down and plans to dump $30.6 billion in debt at a fifth of face value, yet USDJPY and USDCHF are pushing higher.

The advance in the majors is mostly in response to the pick up in the dollar specifically; but the other yen and swiss crosses are also rising - albeit slowly. Is this a side effect from selling in the liquid majors? And, even if it is, how come major risk concerns in the carry trade can't overwhelm a still timid dollar advance and the moderate winds that are coming off of that.

Maybe you're right about the AUDUSD... i was closed out of a position overnight as the price broke through the support line. Still, that's just one pair that has been trending with the AUD. The best one has been the AUDNZD... what do you think about that, the AUDCAD, or any others?

Also though... FXCM's most recent SSI numbers back up your ideas. 68% are long, indicating further losses. Maybe this is the end of this trend for the AUDUSD... though I think that we could enter a range. Since the USD could be hurt next time the FED doesn't do anything, or by the big numbers released later this week Economic calendar | financial calendar | Forex economic calendar. As a result, this trend could all of a sudden be back in play within a few days. So I guess we'll just have to wait and see.

those that are watching the dow for carry purposes...look for resistance near 12,000 this week or early next week. i would sell carry at that point

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