Tags: Break | Out | Carry | Trade | Gem

Another Carry Trade Gem Ready to Break Out

By    |   Thursday, 01 May 2008 02:23 PM EDT

Back on April 2, I told you about a gem of a carry trade, the New Zealand Dollar/Japan Yen, that was heating up.

Since that time, that carry trade has rallied about 200 pips — $2,000 per standard lot that you would have traded. So five standard lots would already be a $10,000 gain.

Now I have another carry-trade log for you to throw on this fire.

Buyers are returning to the stock market on the offense, even buying up stocks on bad news days. This enthusiasm for stocks and the recent stabilization of the stock market is pouring over into the forex market.

Once upon a time, as stocks sold off so did these carry trades. That's because carry trades are where you buy in for the main purpose of being paid daily interest, seven days a week, to hold the position.

As long as the currency pair goes sideways or upward, you win. However, if it's dropping in value overall then the interest doesn't matter as much, so these trades suffer during those times.

Now that stocks are recovering and stabilizing once again, the risk appetite is returning not only to stocks but also to currencies.

What do these currency traders look for first? Juicy carry trades, because they'll earn daily interest while they patiently wait for appreciation in the pair to add to the gain.

Thus they win two ways — appreciation and interest.

So it's like buying a dividend-yielding stock, except these pay out daily while stocks pay out dividends only quarterly. Plus, most high-dividend paying stocks are not known for their surging growth.

Yet these carry trades are known to be good growers over time. So you can see why there's a thirst for them.

When traders think pairs are stabilizing, they run in and snatch them up. However, the first money into these goes into only the most stable carry trade pairs. So these investors are looking, you might say, for the General Electric of carry trades.

So which one may be the most promising, right now? I'd say the Australian dollar vs. the Japanese yen.

The Australian economy has been red hot even when most countries were feeling the spill-over effects of the U.S. subprime crisis. Their employment market is tight, which is good. Most people have jobs.

Why is it so good over there? Because China is buying up their natural resources like crazy right now. That means the Australian economy is getting business from one of the biggest growth stories in the world right now, China.

China has kept Australia's economy firing on all cylinders. In fact, it's almost too good. Inflation is running at an annual rate of 4 percent. That's way too high for their central bank's comfort level, which is around 2 percent to 3 percent

So what do they do to put some water on that fire? They keep interest rates high, even consider hiking interest rates if needed.

Naturally, money is attracted to that high yield.

Australia's currency yields 7.25 percent while the Japanese yen only yields a paltry 0.50 percent. So, the Japanese are more than happy to send their money overseas to Australia.

Why not, what do they have to lose? Their interest rate is peanuts compared to what they could get across the ocean.

However, it's not just the Japanese getting in on this game. No, hedge fund managers looking for easy returns all the way down to mom-and-pop traders all over the world.

Because, in the forex market, all you have to do is place a buy order of AUD/JPY and you're good to go. No opening of foreign bank accounts or sending your money overseas.

If you're in America, you can transact trades like this through firms like www.fxcm.com or www.oanda.com, for instance.

The added bonus in owning AUD/JPY, besides the interest, is that the long term downtrend just broke days ago. The pair is starting to head higher for the first time since November of last year.

Many won't realize what you're hearing about today until the trend is half over and it's obvious to everyone. So check this one out and see what you think.

Australia's economy is going to take a long time to cool down. This means that the central bank is going to have to keep rates high for a very long time.

Meanwhile Japan's rates won't move upward materially at the same time. All the pieces are in place for another great carry trade play.

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Back on April 2, I told you about a gem of a carry trade, the New Zealand Dollar/Japan Yen, that was heating up.Since that time, that carry trade has rallied about 200 pips — $2,000 per standard lot that you would have traded. So five standard lots would already be a...
Thursday, 01 May 2008 02:23 PM
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