The Carry Trade: Buy or Sell? - Page 14

Bertie Stemp · #**196** (**permalink**) 10-10-2008, 07:32 PM

Yeah John and Karen, i totally see your logic, of course it is far to volatile to trade them now, and the rolls we are seeing, in many cases are still not that attractive to say the least.

At what point in your, or anyone else who is reading this' opinion, did the carry trade become a "bad idea", i still see it is rated as a good tactic for 2008 in the poll, id better go and log my vote then!...

It seems that it is going to take a long while for things to become more, errm, transparent shall we say, and for all the woes to settle. For now, lets wait...

arranp · #**197** (**permalink**) 10-18-2008, 03:59 PM

Recently we have had the bank news, high overnight and 3 month interbank lending rates, dollar strength and yen strength.

Now banks are being re-funded and interbank lending rates show signs of dropping. Attention is turning to the marco-economic... gobal recession, increasing unemployment, lower retail sales and calls for further cuts in interest rate.

Against EUR, GBP, AUD, CAD, NZD the dollar has been bullish and yen has been bullish but as a pair USD/JPY where do we see these two going over the next 6 to 12 months, what are the compelling arguments ?

My apologies, I meant to post this in the USD/JPY forum.... and have moved it there.

John Kicklighter · #**198** (**permalink**) 10-20-2008, 03:46 PM

Quote:

Originally Posted by Bertie Stemp

Yeah John and Karen, i totally see your logic, of course it is far to volatile to trade them now, and the rolls we are seeing, in many cases are still not that attractive to say the least.

At what point in your, or anyone else who is reading this' opinion, did the carry trade become a "bad idea", i still see it is rated as a good tactic for 2008 in the poll, id better go and log my vote then!...

It seems that it is going to take a long while for things to become more, errm, transparent shall we say, and for all the woes to settle. For now, lets wait...

Personally, I think the strategy really lost its appeal this summer when carry baskets started to really tumble after breaking a multi-year rising trend. A more objective gauge though would be to say the party really ended when currency volatility started to genuinely push above 10 percent. If your strategy depends on small steady rolls that can easily be swamped by normal climbs and tumbles in exchange rates, then this strategy could essentially kill your account - especially on leverage!

Bertie Stemp · #**199** (**permalink**) 10-23-2008, 05:53 PM

Thanks again for your valuable insight John, that is very useful to know.

For anyone else out there that is still trading using the carry method, which pairs if any are you looking at.

Does anyone feel that some of the GBP crosses are attractive in any way at the moment?

I read on Dailyfx.com, in an article written by Jamie Saettele, that he feels the GBP/NZD looks "ready to rally".

To repeat the longer term analysis that I have held for months; “A C wave is working higher from the low earlier this year. This advance will most likely exceed 3.0702 within the next number of months. 2.5726 may be a wave ii of 2 low. A bullish bias is warranted against there although price ideally remains above 2.6420.” The GBPNZD has taken off as expected and it will probably be just a matter of weeks before 3.0702 is exceeded. Near term, price should remain above 2.6171. With the objective over 3000 pips away, this is a solid reward/risk opportunity.

Originally posted at Dailyfx.com HERE

Does anyone have a different take on things?

Bertie Stemp · #**200** (**permalink**) 10-28-2008, 08:17 PM

I think that judging by the lack of activity of late on this particular topic says one of two things.

Either, the carry trade is well and truly dead for now! Or, the carry trade is just waiting to regain some life! haha.

I see that Icelands interest rates were hiked all the way to 18%, thats and actual % increase of 6%, (rates were 12% previously). Does this not mean that a carry trade in the Icelandic currency is a great idea! LoL.

Anyway, I loved the idea of the carry trade, it is a great strategy, but it clearly has died a premature death of late.

It will be back one day. Anyone have any ideas on when?

jerrystrang@sha · #**201** (**permalink**) 11-09-2008, 11:08 AM

I am short EUR/GBP does anyone agree that a top may be in place?

Bertie Stemp · #**202** (**permalink**) 11-13-2008, 05:51 PM

A lot has been said about this pair recently, my main analysis of the situation and the sentiment i am hearing in the market, is that the EUR is vastly overvalued against the GBP and most major currencies.

Indeed, there is speculation as to whether the EUR can even survive the position it finds itself in.

It is not for me to say whether a top is forming, but my feeling is that it is not far off.

Bertie

#**203** (**permalink**) 11-18-2008, 08:19 PM

As FXCM points out, there is a high correlation between the yen cycles and stocks. Attached shows this even extends to the DAX futures, with EURJPY almost in lock step on the half hour, albeit with a flatter/lower tilt or bias.
Sorry about the width of the charts.

John Kicklighter · #**204** (**permalink**) 11-19-2008, 01:34 PM

I have attached an updated chart of the volatility index for the currency market and the carry basket.

It's true that volatility is pulling back a little; but considering its relationship to levels 6 months, a year ago - and the overall level of the carry basket - we are still a long way away from risk appetite taking over for risk aversion.

John Kicklighter · #**205** (**permalink**) 01-06-2009, 11:15 AM

It is interesting to see what is happening to risk appetite through the first few trading days of the new year. The return of liquidity seems to have accompanied a rebound in risk appetite - though fundamentals (it can be argued) have actually deteriorated.

I have attached an image of Deustche Bank carry trade harvest index and the equal weighted volatility index that we have created. We can see over the past few days, the carry index has actually broken out of its descending wedge - taking the first step towards a genuine reversal. However, volatility is still very high; but that may be an influence of the lack of liquidity in the credit market pushing up premiums and therefore volatility in forex options.

Interesting times.

SkiBunny · #**206** (**permalink**) 01-16-2009, 01:32 AM

Is that rebound still intact or is risk appetite on the wane again?

John Kicklighter · #**207** (**permalink**) 01-19-2009, 04:11 PM

I don't know if you looked at the Carry Trade report I updated on Friday, but the you can see that risk appetite actually pulled back to a new six-year low last week. Once again, I have the DB version for an example; and from the chart you can see their measure came very close to a similar low.

While a short-term bounce initially keeps congestion in play, we are near a terminal point where the market will have to pick a direction. If we break lower, it will be more market moving and it will ultimately be a greater shift in sentiment (technicals are good for understanding the market). Alternatively, a bounce higher will have to cover far more ground before we can say congestion has turned into a rebound in risk appetite.

John Kicklighter · #**208** (**permalink**) 01-26-2009, 03:35 PM

The carry index has pushed to yet another six-year low, but the market is hesitating on completely changing its stance outlook for risk trends and forced deleveraging. If we don't find significant follow through to confirm this important level, I think the market will ultimately reverse.

Another issue is FX volatility. Our gauge of expected price action has held up around 20% (annualized) for some time; and if it holds high for so long without paying off with actual price action, I think we will eventually see it deflate.

As I usually write in the carry article, there are two major factors to risk appetite - actual risk (fear) and expected reward. The old fear / greed argument. I'm trying to develop a good gauge of general return for the market to match the broad risk gauge we have (volatility). If you have any ideas on what would be a good component or components to go into this gauge, lay them out. I may actually use them.

qed · #**209** (**permalink**) 01-28-2009, 01:32 PM

Quote:

Originally Posted by John Kicklighter

The carry index has pushed to yet another six-year low, but the market is hesitating on completely changing its stance outlook for risk trends and forced deleveraging. If we don't find significant follow through to confirm this important level, I think the market will ultimately reverse.

Another issue is FX volatility. Our gauge of expected price action has held up around 20% (annualized) for some time; and if it holds high for so long without paying off with actual price action, I think we will eventually see it deflate.

As I usually write in the carry article, there are two major factors to risk appetite - actual risk (fear) and expected reward. The old fear / greed argument. I'm trying to develop a good gauge of general return for the market to match the broad risk gauge we have (volatility). If you have any ideas on what would be a good component or components to go into this gauge, lay them out. I may actually use them.

Presumably you don't want to do the carry trade when volatility is high, but I don't understand what currencies you are using to calculate volatility. Are they all given equal weighting? Just making a casual observation it seems that the highest yielding pairs AUD and NZD are moving sideways, and much of the volatility in the currency market as of late has been in the GBPUSD and EURUSD.

You talk about forced deleveraging as a risk, but wth the Federal Reserve accepting many of these assets on its balance sheet it seems like more of a controlled crash landing then forced deleveraging. Can't the carry trade work under these conditions? The deleveraging that I see is in GBP(Banks) EUR(Banks) CHF(banks) USD(consumer), not the AUD NZD.

John Kicklighter · #**210** (**permalink**) 01-29-2009, 12:09 PM

Quote:

Originally Posted by qed

Presumably you don't want to do the carry trade when volatility is high, but I don't understand what currencies you are using to calculate volatility. Are they all given equal weighting? Just making a casual observation it seems that the highest yielding pairs AUD and NZD are moving sideways, and much of the volatility in the currency market as of late has been in the GBPUSD and EURUSD.

You talk about forced deleveraging as a risk, but wth the Federal Reserve accepting many of these assets on its balance sheet it seems like more of a controlled crash landing then forced deleveraging. Can't the carry trade work under these conditions? The deleveraging that I see is in GBP(Banks) EUR(Banks) CHF(banks) USD(consumer), not the AUD NZD.

Good observations.

Typically you do not want to want carry when volatility is high. When their is a significant potential for large swings in price action, the steady income from carry is dwarfed by the potential for a capital loss that is amplified by the same leverage you are using to collect at 5 EST every day.

The index is an equal weighted composite of the implied volatility behind the EURUSD, GBPUSD, USDJPY, USDCHF and USDCAD at the money options. The aussie and kiwi dollar pairs don't have enough open interest to make their readings reliable. We have worked with both weighted and equal weighting compositions, but found that equal weighting provided the best results.

As for forced deleveraging, there is a lot of debate over whether this will still be a threat with all these stimulus and bailout packages. We are getting new efforts; but consider that the risk didn't go away with guarantees on debt, near-unlimited liquidity injections and huge bailout packages. The US is making considerable efforts; but they don't have enough money at hand to solve the entire problem; so if panic rises, there will always be the threat of forced deleveraging. What's more, this is a global problem; and all efforts thus far have been largely national.