What do you folks think of this basket?

ElectricSavant

ElectricSavant

I am working on this interest earning Basket:

Long USD/JPY
Long NZD/USD
Short CHF/JPY
Long EUR/CHF
Short EUR/USD
Long AUD/USD

This leave’s the trader Long NZD and Long AUD if he were to buy equal units of each, I believe. I will need to use my dealer/marketmaker's exposure tab for fine tuned weightings. I really like my dealer/marketmakers method of interest payments. I get hard cash daily, put into my account for the carry. The huge PICS* interest that I get allows me to dial down the exposure low enough to endure the change in UPL...

One could add these three pair:

Long GBP/JPY
Short GBP/USD
Short USD/MXN

This would add a long MXN and a short JPY to the mix…

Michael B.

* = Positive Interest Carry System.
 
Well?

I can see you lurkers there...no hiding? and no... I did not do a skalpzy and open my attachement several times and view my thread zillions of times...
 
Quote from ElectricSavant:


This leave’s the trader Long NZD and Long AUD if he were to buy equal units of each, I believe.

More...

Given that NZD and AUD are both hovering near ten year highs, wouldn't this put the trader in a very risky long term position?

-Otherwise it's a shame that Oanda doesn't offer NZD/JPY, which would provide even better interest than AUD/JPY.
 
Hello Electric,

How is your PICS working out for you, it's been sometime since I last looked at it?

Your first batch leaves you short CHF versus the long NZD & AUD.

Is there a reason to be short the CHF versus the lower cost JPY?

And if you want to be long MXN vs. short JPY all you need is two pair. That reduces your loss in the interest spreads

short USD/MXN
LONG USD/JPY

BTW, this particular trade (+MXN/-JPY) would have been almost perfect if it had been put on between August - October 2005.
 
I think it bears repeating that there is NO inherent edge in playing nominal rate differentials in a passive carry mode.

Unless you have the ability to anticipate one currency's rates rising or falling vs another BEFORE the street prices it in, you will have no advantages simply going long a higher yielding currency vs a lower one. In the end, you will essentially just be competing with other carry trade positions which may have been opened far earlier than you. When everyone else gets out of that trade, whatever interest you've accrued over months can very easily be wiped out in a matter of days. The rate differential is priced in already.

I'm sure there are some traders who can successfully implement the tendency for other traders to continually lean in one direction in certain currency pairs to their advantage, but it's a far more complex process than just buying X and shorting Y because one yield is higher than the other. There is just no getting around the necessity for good timing, as with any other method of trading.
 
Illiquid,

Could you explain this and how the mechanics of it would be in Retail Spot Forex?

My dealer/marketmakers quotes mimick the other dealer marketmakers and I am told very near the EBS, but I have not confirmed that. So the interest that is paid to the balance is not reflected in a "shadowed" price, as my dealer/marketmaker does not adjust price in a rollover scheme. In Futures I may agree with you...those are contracts that expire.

Also you do not seem to recognize the hedge? Who cares if one moves against, when one move opposite? This basket is EUR and USD neutral.

Michael B.


The rate differential is priced in already.
 
I believe there is no difference whether the strategy is implemented via futures or cash, either you receive the interest incrementally or through simple convergence via futures.

What I mean by "already priced in" is illustrated in JPY movement this past week -- if not for the carry traders continually selling yen vs a host of other currencies (record yen spec shorts in COT reports), I doubt the yen would have moved so far so quickly. Passively holding short yen would result in losses which could easily surpass any measure of interest accumulated. How much have AUD/JPY holders lost this past week, and how far back does one need to have held this pair in order to come out still ahead? Again, success all comes down to how you time your entries and exits.

As for this specific basket, you may be EUR and USD neutral, but you are basically long AUD and NZD vs CHF. There is no way one can consider oneself safely "hedged" with that position -- there are very explicit circumstances which would cause a trader holding those pairs to lose very heavily (war breaking out in Asia, for a crude example).
 
The sky is falling, should not be a reason to not trade.

I get real money added to my balance, everyday...I can wait as long as I expose myself to about a 30% yield. The greedy ones, fall by the wayside...

Michael B.

P.S. the real weakness here is if the interest rates go away...which is also possible...thats why I remove my original investment, as soon as I can.

P.P.S. My dealer/marketmaker could go out of biz too...yes this is a real concern for somebody looking years down the road...
 
I am aware of all the pitfalls...I have been doing this long enough to understand.

Some traders cannot handle the upl....most traders have short horizons and this is not for them.

Michael B.

P.S. I got a PM from some lady in another Forum, who said she had been putting 50 bucks a month into EUR/HUF at 10:1 leverage for some years....she said she wanted to learn about hedging..Actually EUR/HUF was not a bad choice as it does not have a huge 1000 day range behind it...
 
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