You're right, sloppy wording. I should say a very low risk opportunity.
IB - do I pay for continuously holding FX trade over weeks,months?
- Thread starter Tomaz26
- Start date
As I stated earlier, there is no guarantee that AUD will be at it's Dec futures price in Dec, you'll always be able to find times where that didn't happen. In fact the Yen carry trade worked great for years until it didn't. The forward price is purely mechanical from the interest rate parity equation. However it's a pretty strong headwind to bet against, if it wasn't than you'd get abnormal returns by simply always buying higher interest rate futures.
We're talking about two different things here.
I get what you're aiming at. You're talking about current interest rate arbitrage and spot vs forwards. The forwards rely on where the yield curve sits at this time... and if there is a deviation you could arb it. But that's at current rates... and the current yield curve....
I was talking about the FED raising rates in the near future, while the RBA would be aiming at keeping rates as is or more likely to lower another 1/4%. In that case, the USD will appreciate against the AUD because holding USD against AUD makes more sense... or more specifically, holding the AUD at higher rates against USD is a bit less interesting... so downward pressure in the Aussie going into the rate decisions.
Forwards/Futures don't predict future values of the fx-pair... it's a current interest rate/yield curve depiction, where you trade spot vs future... it's an interest rate swap... if you hold AUD spot long vs USD, you sell the forward... and have no currency risk, only risk in change of the yield curve...
Again, it's purely a yield curve play. The Yen carry trade was not aimed at betting in the currency itself to appreciate or fall... it's just about interest rates. The trade lost because the U.S. interest rates dropped and yield curve flattened... causing a drop in USD vs JPY exchange rate.
If you look at the USD.JPY 5 year future, it trades around 93 vs a spot of 103. That doesn't mean everyone expects the Yen to rise 10% in the next 5 years...
On the contrary, I would say the USD will significantly appreciate against the JPY, because the FED will first raise their interest rates, while the BOJ will be stuck at minus rates for quite a while.
EDIT. I say trades around 93, it's actually the price IB gives as last traded, which is probably not correct/current. But it will 'trade' below spot, because you example from AUD.USD holds.
Last edited:
Another look at this example..
The current GBP.USD spot is at 1.50
The current 1yr forward is at 1.48... (1.065,60 / 720)
The current 1yr forward should be at 1.458... (1.50 x 1.05/1.08)
So either the 1yr forward is incorrect or the spot... my guess is the forward, since that's a derivative of the spot and yield curve...
So for the 1.48 in the forward to hold, indeed the GBP should appreciate/USD depreciate to 1.522, or the U.S. interest rate should rise from 5 to 6.56% or the U.K. rate to drop from 8 to 6.42%.
But again... it's just the forward that's priced incorrectly. Not the interest rates (which are a given since set by CB or through highly active bonds/swaps etc), nor the spot which should be bigger traded than the forward.