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Chapter 26, Part II. Should We Rely on Carry Solely? Page 7

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 26, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    Carry tuning

    Commander in Pips: Since we have finished with discussion of foundations of carry, let’s speak about parameters – what currencies to choose for carry and what the risk of carry is.

    At the first question we’ve answered already:

    1. We need as greater interest rate difference as possible, but at the same level of credit risk. I mean, probably you may find some currency, say the Russian Ruble that has 8.5% interest rate, but Russia’s credit rating is BBB+ while US rating is AA+ (almost AAA), so this difference comes from credit risk also. That’s why when we’ve said “greatest rate difference” we mean among comparable currencies in terms of credit risk – major currencies.

    2. We need for fundamental perspectives stay positive for a significant period of time.

    3. The currency pair should stay in the range or show some move in a favor of a higher rate currency.

    Here is a chart of AUD/JPY from 2002:


    Chart #1 | AUD/JPY monthly
    [​IMG]

    Impressive, right? While Australia has passed through some world cycles during this period, Japan economy remains weak, since it has entered long recession and stagnation right from 1990s. So, Japans rates were at lowest levels around 0.1%. This was a really good possibility for carry…



    Now about risk aversion:


    Chart #2 | AUD/JPY monthly
    [​IMG]

    In 2008, the world economic crisis has come and caused a jump in risk aversion. Despite the fact that the AUD and JPY rate difference remains significant, high demand for safe haven JPY broke the previous long-term tendency. But in 2009 you can see that some kind of positive carry has been reestablished.

    Also the great example of risk aversion you may find on USD/CHF pair from 2008. Although rate difference is quite shallow, CHF has shown outstanding growth, since this is a safe haven currency.
     
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