Chapter 26, Part II. Should We Rely on Carry Solely? Page 4

Commander in Pips: Sure. Since carry is a feature of long-term positions, you have to be sure, that there will not be any problem with economy that you invest in - no matter what you’re doing – buying currency (long in AUD/USD of AUD/JPY), Australian bonds or shares – anything. You must have confidence that the Australian economy has a nice pace of growth, probably central bank even increasing the rate again, so carry will become even bigger. That is a question of fundamental analysis. At the same reasons you open AUD/JPY position on a monthly chart. In other words, you should have confidence about perspectives of the Australian economy for the term of your investment horizon. In this case any fund will not just succeed in real investments in bonds and shares; it also will get huge positive carry, and, probably rate appreciation. So, good perspectives on the economy are some kind of insurance that your carry will have significant additional profit on long-term forex pair position and not a shallow compensation of loss or drawdown.

This usually happens when business cycles turn to a growth phase after recession. Better to anticipate increasing of carry at the early growth stage that is called the “disinflation stage”. At this stage inflation is low and markets are only starting to rise. Since the central bank has not started rate increasing yet, carry could be not so impressive. The second growth stage is “inflationary” that is typical for an overheating economy. At this stage the central bank starts to increase rates to control inflation, while the economy still continues to growth but at lower pace. This stage gradually turns to stagflation and then again to recession, when central bank starts to decrease rates, since growth becomes anemic and inflation turns to decreasing.

Pipruit: And what about world economy, second part in our discussion…​