Can someone evaluate my currency "strategy"?

[Saltynuts]

I think its called net interest rate differential sef88. Trying to find the actual rates now.

 

[Saltynuts]

It is very weird, you would think the net interest rate differential is critical to any long term forex trading strategy. But I am not seeing them listed anywhere right off hand. I would have thought they would be everywhere.

 

[BKR88]

It is very weird, you would think the net interest rate differential is critical to any long term forex trading strategy. But I am not seeing them listed anywhere right off hand. I would have thought they would be everywhere.

https://www.oanda.com/us-en/trading/financing-fees/

 

[El Trado]

Thanks sef88. Why is that? I was looking at Oanda live spreads the other day. The spreads look like they are two what I understand are called "pips". So a U.S. dollar against some other currency might be 1.8884 bid 1.8886 ask. If you buy you have to get the ask, sell get the bid. So that 2 pip difference is almost nothing, a very, very small percentage. And I understand that is all you are paying - no commission on top of that.

Am I missing something? I don't see how futures could be much lower than that, or if they were why one would even care because the extra "cost" you are paying via the spread seems almost nothing.

Nope. You are right. The spread is all you pay. The spread might widen in less liquid time periods, and are wider for more "exotic" currencies, but spread (and a finance charge if you keep positions open for a while) is all you pay.

I have traded a lot with Oanda and is happy with them.

However, since a futures contract might cost you 2 dollars or something like that, and be the same regardless of size, if you are trading a $2 mill position or something it will end up being cheaper. But Oanda will be a lot less for smaller trades...

 

[El Trado]

Although, can one even trade the Argentine Peso? Maybe not, not seeing it at Oanda. I guess everyone realizes what I'm saying so no one in their right mind would buy the Peso versus anything else?

Nope. Oanda does not have Argentinian Peso. Neither do they have Russian Rubles nor Brazilian Reals. Turkish Lira was removed a while back as well.

The problem with those, is that the financing costs would be insane due to how Oanda calculates. So it would not work out as a "no-brainer" trade regardless if the direction pretty much never change

 

[BKR88]

Then you would have to pay overnight interest. Whereas for futures, you don't have to pay if there's no change in spot.

Forex has swap fees (interest) which futures don't but currency futures have interest payments priced into via contango/backwardation so your position will decay based upon the interest rates.
If futures didn't have interest rates priced in, it would be an arb trade to go long spot (on a currency with a + interest) to collect interest payments and hedge by going short the futures.

Look at the futures prices of Swiss Franc & Mexican Peso. Franc is in contango as their currency has a negative .75% interest rate while Mexican Peso is in backwardation as their currency has a positive 4% interest rate.

Canadian dollar futures are neutral as they have the same interest rate (.25%) as the US dollar.

 

[BKR88]

However, since a futures contract might cost you 2 dollars or something like that, and be the same regardless of size

Futures charge a set fee for every contract so no savings by going with larger position size.

 

[Poljot]

Are you basically planning to buy currencies with the highest real inflation rates?

Here is the data, downloadable to excel, but the latest year is 2019.

https://data.worldbank.org/indicato...st_recent_value_desc=true&start=2019&view=map

I wonder where can you get those MDG, ZWE, COD, KGZ..., fly to Africa with a suitcase?

 

[sef88]

Forex has swap fees (interest) which futures don't but currency futures have interest payments priced into via contango/backwardation so your position will decay based upon the interest rates.
If futures didn't have interest rates priced in, it would be an arb trade to go long spot (on a currency with a + interest) to collect interest payments and hedge by going short the futures.

Look at the futures prices of Swiss Franc & Mexican Peso. Franc is in contango as their currency has a negative .75% interest rate while Mexican Peso is in backwardation as their currency has a positive 4% interest rate.

View attachment 253425

Canadian dollar futures are neutral as they have the same interest rate (.25%) as the US dollar.

View attachment 253427

Brokerages will usually add further costs on the rates. So futures still make more sense.

https://www.interactivebrokers.com/en/index.php?f=46376

 

[JSOP]

This started with me thinking about the risk the dollar is going to go down long term given that we are printing money at HUGE annual clips. Like 23% of all dollars in existence were printed last year. That is NUTS. And apparently no plan to slow down the printing.

So I want to buy currencies to try and profit from the dollar devaluation.

But I don't want to go too far out on a limb as who knows, I could be wrong. So I want to hedge myself. I want to short currencies that might be printing money even faster than we are printing money.

In my mind, while I know a TON of things can affect currency pricing, in the long run, if one company is printing money at a 23% annual clip, and experiencing 3% growth in inflation-adjusted GDP year over year, and another is printing money at a 3% annual clip, and experiencing 2.5% growth in inflation-adjusted GDP year over year, in the very long term the second one is going to have to appreciate versus the first one.

I always look at the U.S. dollar versus Mexican peso, only because its the one whose pricing I've been aware of at all over a long period. When I first went to Mexico in the early 90s, it was around 7 pesos to the dollar. And I remember someone telling me it had previously been like 4 pesos to the dollar. Then when I went back on vacation a few years later it was 10 pesos to the dollar. Then another vacation, 12, then another, 14, then another, 20. It was a prime example I think of one currency going up in value against another one long term, because I bet Mexico was printing money as a far higher annual clip than the U.S., almost year after year.

So what I want to do is try and figure out the currencies where the government is not printing money but that are expected to have a decent economy. I would focus on say 5 of those. Each [week] I would put in $X amount into one of those currencies, swapping out which currency every week. So I'd never buy a currency more than once every [5 weeks]. I would be dollar cost averaging in, nice and slow, to avoid getting hit with any freight trains.

Now, to hedge myself a bit in case the dollar did come on strong, I would put $X amount into currencies where it looks like the new printed money/expected growth ratio is much higher than the U.S. I would buy the dollars versus those currencies, say 5 of them, again buying a different one every [week] to dollar cost average in and avoid getting my head taken off by huge trends.

Then I would slowly increase my [weekly] buy ins. So it it was $100 one week, the next week it might be $101. Then the next week $102. Etc. etc. leveraging up my strategy slowly over time again to make more profits but minimize the risk of my head being taken off.

Thoughts? This is the culmination of all my thought powers after many years of deliberation. I hope it sounds like a decent plan!!!!

Thanks.

Countries that are not printing money? Switzerland, China (relatively speaking), many of the Persian Gulf countries that are loaded with oil like Saudi Arabia, Qatar, United Arab Emirates... but the thing is printing money doesn't always automatically lead to a weaker currency as a currency's strength is determined by a variety of factors including political ones too. And even if a currency moves it might not move in a magnitude that would make trading in it profitable.