I am buying every dip in the AUDJPY. All systems go. It is the best pair out there.

Hi,
Im considering the AUD/JPY carry trade. Was wondering someone could answer a couple of questions, I am new at this.
1. If rollover is 3.15%, that would be $3150 per month, do Ihave that correct?
2. Is the 1:2 Risk reward strategy often used? If I risk 500 pips ($5000)
My thinking is hypothetically, of course, if I am in for 2 months and made the rollover, and I see a 500 pip gain (1:1 risk reward) that would be a good exit.

Any thoughts and comments on this are greatly appreciated. Maybe a moderator could direct me to some other posts on where the carry trade strategy is discussed in greater detail.

I understand it should Generally be a 6 month strategy, buying dips or a breakout for entry. Most all pairs are at or near the 200 MA, so somethings going to give soon.

Thanks!

Australia wins hands down. The Eurozone is the equivilent of Inida which has 18 different dialects, only the Eurozone does not have the growth. I am still holding EURAUD short from 1.96 with 1.63 as my target. I will sell the bounces in this pair.

In my opinion, the Aussie dollar is the best carry currency to be looking at. Interest rates are strong (and look to hold a substantial differential through the rest of the global recession barring only the worst domestic crisis) and its economy has proven itself to be a stalwart.

As for your questions, it is important to note that the rollover is variable. We cannot deal at bank rates (the benchmarks). Rather we deal in short-term money market, interest bearing funds. Obviously, these change from day to day depending on demand. What's more, it is perhaps misleading to think of this in terms of percentages. If you expect 3.15% return, that would be on however much you invested. What's more, interest rates are usually quoted on an annual basis. If you were expecting such a return on a standard account that only holds one lot, you would be earning $3,150 a year or $262 per month.

Clearly this changes the aspects of your risk/reward question. With the aforementioned payout, you could only ride a 26 pip loss before risk gets away from you.

This is a long-term trading technique. That's why it is best to trade it in a system, long-term with lower leverage or as a general guideline for a larger strategy (if risk is rising and you want to collect carry, you could buy on dips).

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

I am a big fan of the Australian dollar as a high yeilder and increasingly as a safe haven. It just seems an overall strong currency in my book.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

Thanks so much John for clearing me up. Can you clarify what you mean by "If you expect 3.15% return, that would be on however much you invested."
I "invest" whatever my risk is. If I risk 500 pips on a 100k lot I risk (invest) $5,000. Are you saying I should be calculating on the 5k "risk"?? The carry is paid on the lot size correct? Is the carry interest differential an annual yield?

PS. (I was using an old Aussie rate posted on my wall, just fyi so no one is confused that might read this post)

The fundamentals really seem to be backing this trade. Think about it for a moment, the Swiss government made it clear that they do not want to see their currency appreciate any further. To me that is like handing a short signal on a silver platter, which is of course what they were aiming for.

So why GBP? Well, I decided to pit this short against the pound since it has cut its interest rate to levels not seen in hundreds of years. To me this would mean that it has the highest potential to rise once the interest rate cycle begins again. Of course waiting for that to happen ends up getting you in too late so you need to take a risk and hope that the worst is over, which is why I think now is a good time to enter.

I've attached two charts. There is a 30 year chart that shows this pair is essentially at 30 year lows give or take a few cents. Naturally picking a bottom is no easy task so I've included a daily chart that shows a nice symmetrical triangle break.

I don't plan on this being the trade of the week. Ideally I'd like to see it rise 1000 pips or so giving me a nice cushion so I can earn interest on a daily basis. Right now I'm only in for 20K at 1.6965, which is not a lot but if I am right there should be plenty of time to add. Any thoughts/comments are appreciated - APK

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It really isn't much of a carry trade since the roll is a mere pittance for this pair. Also, it is highly likely that interest rates will remain near zero possibly for years in the U.K. It could be a funding currency much like the JPY has been.

The AUD is still the Mack Daddy of carry trades, unless you are willing to take on more risk with the less liquid currencies.

I agree with you on some points here. The Australian dollar does offer a better roll at the moment but I intend for this trade to be very long term in nature. I probably would have gotten into AUD/CHF instead if Australia had taken their rates as low as the UK did. I see a higher potential in sterling due to the massive drop in interest coupled with the large moves this pair has in comparison to others. Eventually the rates will go up and I don't mind waiting as long as I'm still in the trade.

My strategy is to enter into some small positions now and wait for a 1000 pip cushion. If I'm wrong I lose some money and move on; if I'm right I can add to the position on dips, hoping it will stay afloat. If it doesn't rise further, my risk is limited since I would only add small positions at a time and still have a large cushion. What I see as the biggest benefit is being able to comfortably float the trade and earn interest off of it. If it is at 30 year lows, it would seem that the potential is there for it to return to some higher level. Ideally I'd like for the trade to sit there and just rack up the interest every day - APK

I was just referring to what leverage you are using. The 3.15% will be the return on the margin you put up to float the position. It seems you are calculating return on risk; but that isn't necessarily the risk through the notional and margined position you are dealing with.

The carry is paid depending on lot size, yes. The carry on a 10 lot position is 10 times greater than it would be on a one lot position.

The carry interest differential that you see in the FXCM platform is paid each day. When you are talking about the theoretical difference between benchmark lending rates (which we cannot deal at because we are not banks; rather we deal with money market rates), then you are talking about an annual return.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

I can see GBPCHF play out over the longer term as a carry trade potential. It would have to be one-and-a-half to three year initiative though. What is your primary pursuit here? Capital appreciation in the position or interest yield? From an appreciation standpoint, the pound is severely battered (near record lows against the franc) and the UK will always be considered an investment economy versus the Swiss savings economy.

However, from an interest rate perspective, the BoE is likely to keep its rates very low for at least 6-8 months. After that, they will be cautious in raising. Ultimately, a quick rise in rates will have to come through a sharp increase in inflation; and it takes time for such economic cycles to play out. At the same time, I wouldn't write off the SNB either. They are usually slow to increase rates, but they keep pace with the ECB generally. Their recession hasn't been anywhere as severe as the UK; so they could essential sport a positive differential over the BoE for some time.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

I wrote a report on the possible return of carry trade interests (read the story on DailyFX here). I was prompted to right about it after the 30%-plus rebound in US equities. However, I'm surprised that so many have remained skeptical of this being a recovery. Leads me to believe that either inexperienced/gambling traders have been purged during the financial crisis or the market as a whole is treating contrarian and anti-herd mentality as a regular branch of analysis.

Any dissenters out there?

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

It seems the pull back in risk appetite is rather shallow without fundamentals to pressure the market into a deeper fear.

The Carry Index is still on track with its rising trend and the DailyFX Volatility Index has pulled back from its multi-week rally to multi-month highs.

I'm waiting and watching to see if we see that clear break in resistance for equities and commodities. That will be a signal for me to look at the yield-rich pairs and side with trend continuation.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com

I'm just a newbie trader who is interested in carry trading, thanks for the link.

You are among very few that are looking at the carry trade right now. Since interest rate differentials are still low; people think that it isn't a viable strategy. And for the average retail trader, it may not be right now because daily rolls don't compensate for much in terms of potential capital losses.

However, the carry strategy is one that is always exploited by large pools of wealth; and through those means it could be a very good gauge of both risk appetite, the level of speculative capital floating around the markets and the direction of economic growth in credit-based economies.

The first image below is a carry index and the second is currency market volatility (using three-month options for implied volatility). Carry interest is growing and risk seems to be pulling back. This jives with the general bias of equities and other retail-friendly markets; but I'm still skeptical over the potential for returns and the abundance of financial risks out there.

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John Kicklighter is the author of Dynamic Carry Trade Basket, Watch What The Fed Watches, and Forex Trading Weekly Forecast on DailyFX.com