EUR USD JPY

You’ve read about it in the newspapers, and you see it in almost every financial trading magazine… but what exactly is a carry trade? And why is it so popular?

Before I go into what happens in carry trades, allow me to briefly share with you why “carry trade” is an important concept to understand…

Throughout most of 2006 and 2007, carry trades have played a major role in influencing the major trends of various currency pairs. Just take a quick look at the EURUSD, USDJPY, AUDJPY, CADJPY or NZJPY trading charts during this period and you’ll see what I mean. You’ll notice a major uptrend across these currency pairs, and this is mainly due to the effect of carry trades. If you were in-the-loop during this period, you’d undoubtedly be a very rich trader by now! All you had to do was to trade in the direction of the trend and you’d be winning big most of the time.

Simple Carry Trade Theory

Thankfully, the concept of a carry trade isn’t difficult to understand. Let me use an example to illustrate:

Imagine there are two banks. Bank A charges an interest rate of 8% a year, and Bank B charges an interest rate of 2% a year.

If you’re a quick thinker (and I’m sure you are), you’ll realize that you can just borrow money from Bank B, and deposit that money in Bank A (to earn interest) for a sure profit!

And this simple technique is basically what carry trades are about. The difference is that instead of exploiting the interest difference between Bank A and Bank B, institutional traders and fund managers exploit the difference between the interest differences between countries.

Carry Trades In Reality

In reality, people like to borrow the Japanese Yen (JPY) to purchase other ‘higher interest rate’ currencies such as the New Zealand Dollar (NZD) and the Australian Dollar (AUD).

This is because the Yen typically charges a relatively low interest rate of 0.5%, compared to the NZD and AUD which interest rates are roughly 6-8%.

Are you fed up with the emotional ups and downs of watching the forex rates all day, every day? Is it interfering with your life ?

The founder of forexpricealert.com was also constantly watching the prices almost every minute of the day during the trading week. It would interfere with his business, his social life and most importantly his family life. Sunday nights would be a rush to get home to be infront of a computer just to login and see what the market was doing.

1am and he would log on to check the AUD and NZD markets and watch the news on bloomberg to see what was going on in the other side of the world when really none of that mattered.

It occured to him at that point that it would be great and much less stressful to have a system that you could enter your price target and you would get an email or sms alert when the price reached. It was the ideal solution to set your limit orders or stop loss prices so that you knew where you were in terms of your trading.

The final result was a 100% free, no strings attached service offering exactly this to full or part time forex traders worldwide!

All you need to do is log on, enter your name and email address, you don’t even need to enter your telephone number, date of birth, etc… then you choose your currency pair, mainly AUD, USD, GBP, CAD, JPY, EUR and NZD, set your price and leave the rest to the system.

Check it out and see what you think.

www.forexpricealert.com

Lately, I’ve been talking about the dollar’s decline…and so far, I’ve been right. However, the last few days in the market has gotten some traders to question their positions and its even scared others out of their positions. Not me! Here’s why…

Nothing has changed in the fundamental picture to warrant a true “dollar rally” that would change the dollar’s downtrend back into an uptrend. Trends in currencies don’t change often, and that’s because the fundamentals behind those economies don’t change directions often.

So if a “true” technical trend-change were to take place on the charts, it would be because there is an actual “fundamental stimulus” that is taking place. Yet, I don’t see anything like that on the horizon…therefore, I know that any rally upward, is simply what I call a “sucker’s rally”.

That’s a rally that traders jump into because they think a trend change is coming. Yet the trend is still downward and will remain downward due to the fundamentals.

Let’s take a look at the fundamentals for a moment and I’ll show you what I mean.

Why Money Flows to a Currency!

Money generally flows into a currency because it’s “chasing yield”, meaning that they want to place their money where it can get the most interest. However, interest rates are only high or headed higher when high inflation exists. When that happens, central banks have to raise interest rates to combat the rising inflation.

So we should look to see how the inflation numbers look in order to get a sense of where investors will be putting their money.

U.S. & Japan are “deep in deflation” right now!

You will notice that the “high inflation” places of the world are places like New Zealand, the U.K. and Australia. Now the U.K. has been printing money way too much, and so that has delayed the effects of the currency gains in the pound so far.

Here’s why the Fed won’t be raising interest rates anytime soon!

However, New Zealand and Australia have both responded fairly well lately and its due to these inflation numbers.

Now look at who is at the bottom of the list: Japan and the U.S. In fact, their inflation numbers are actually negative which means that its “negative inflation” or also known as deflation.

Now, if an economy is in deflation, is there a need to raise interest rates? NO! Why? Because there’s no inflation to fight. In fact, a bigger enemy than inflation exists…and that’s deflation.

Therefore, you can count on it being quite some time before the U.S. or Japan raise interest rates. Therefore, you can also count on money flowing away from the U.S. and Japan, generally speaking. Where will it go? To the inflationary areas of the world that will have to hike interest rates earlier and keep those rates high for a prolonged period of time in order to tame inflation so that it doesn’t get out of hand.

Since the U.K.’s interest rate is small and they are still in “printing money mode”, much of the money has found its way to Australia which has the highest interest rate of all of the industrialized countries, only to be followed by New Zealand.

This is why I believe that the dollar’s recent rally is simply a bear market rally…a sucker’s rally. You see, even bear markets have upward corrections just as any uptrend has pull backs. Everyone expects pull backs within any uptrend…but they’re shocked when a bear market rallies. I’m not!

And this is just one more bear market rally for the dollar. Therefore use these times to buy the pull backs of the inflationary currencies while shorting the deflationary currencies. This would mean buying currency pairs like AUD/USD, AUD/JPY, NZD/USD and NZD/JPY. These are the ultimate inflation vs. deflation plays right now. It doesn’t mean they will go up every day, because they won’t. But it does mean that they are the ones most likely to hold their uptrends.

The only thing that would likely reverse this scenario would be a “double dip” recession. I don’t see those cards in the deck just yet. So I’ll stick to my inflation vs. deflation play.

Now, looking to the technical side of things…the dollar remains in a downtrend as noted by the downtrend line and its declining 50 Day Simple Moving Average. The Slow Stochastics are just about overbought in the downtrend and the MACD still has its lines below the “zero line”. These are all bearish implications which happen to also match the fundamental outlook. That comes as no shock because it’s the fundamentals that produce technical trends. 

The U.S. Dollar Index Downtrend Likely to Continue on Weak Fundamentals!

Note: This is my opinion and you should do your own analysis to see if it confirms my findings.

Lately, I’ve been talking about the dollar’s decline…and so far, I’ve been right. However, the last few days in the market has gotten some traders to question their positions and its even scared others out of their positions. Not me! Here’s why…

Nothing has changed in the fundamental picture to warrant a true “dollar rally” that would change the dollar’s downtrend back into an uptrend. Trends in currencies don’t change often, and that’s because the fundamentals behind those economies don’t change directions often.

So if a “true” technical trend-change were to take place on the charts, it would be because there is an actual “fundamental stimulus” that is taking place. Yet, I don’t see anything like that on the horizon…therefore, I know that any rally upward, is simply what I call a “sucker’s rally”.

That’s a rally that traders jump into because they think a trend change is coming. Yet the trend is still downward and will remain downward due to the fundamentals.

Let’s take a look at the fundamentals for a moment and I’ll show you what I mean.

Why Money Flows to a Currency!

Money generally flows into a currency because it’s “chasing yield”, meaning that they want to place their money where it can get the most interest. However, interest rates are only high or headed higher when high inflation exists. When that happens, central banks have to raise interest rates to combat the rising inflation.

So we should look to see how the inflation numbers look in order to get a sense of where investors will be putting their money.

U.S. & Japan are “deep in deflation” right now!

You will notice that the “high inflation” places of the world are places like New Zealand, the U.K. and Australia. Now the U.K. has been printing money way too much, and so that has delayed the effects of the currency gains in the pound so far.

Here’s why the Fed won’t be raising interest rates anytime soon!

However, New Zealand and Australia have both responded fairly well lately and its due to these inflation numbers.

Now look at who is at the bottom of the list: Japan and the U.S. In fact, their inflation numbers are actually negative which means that its “negative inflation” or also known as deflation.

Now, if an economy is in deflation, is there a need to raise interest rates? NO! Why? Because there’s no inflation to fight. In fact, a bigger enemy than inflation exists…and that’s deflation.

Therefore, you can count on it being quite some time before the U.S. or Japan raise interest rates. Therefore, you can also count on money flowing away from the U.S. and Japan, generally speaking. Where will it go? To the inflationary areas of the world that will have to hike interest rates earlier and keep those rates high for a prolonged period of time in order to tame inflation so that it doesn’t get out of hand.

Since the U.K.’s interest rate is small and they are still in “printing money mode”, much of the money has found its way to Australia which has the highest interest rate of all of the industrialized countries, only to be followed by New Zealand.

This is why I believe that the dollar’s recent rally is simply a bear market rally…a sucker’s rally. You see, even bear markets have upward corrections just as any uptrend has pull backs. Everyone expects pull backs within any uptrend…but they’re shocked when a bear market rallies. I’m not!

And this is just one more bear market rally for the dollar. Therefore use these times to buy the pull backs of the inflationary currencies while shorting the deflationary currencies. This would mean buying currency pairs like AUD/USD, AUD/JPY, NZD/USD and NZD/JPY. These are the ultimate inflation vs. deflation plays right now. It doesn’t mean they will go up every day, because they won’t. But it does mean that they are the ones most likely to hold their uptrends.

The only thing that would likely reverse this scenario would be a “double dip” recession. I don’t see those cards in the deck just yet. So I’ll stick to my inflation vs. deflation play.

Now, looking to the technical side of things…the dollar remains in a downtrend as noted by the downtrend line and its declining 50 Day Simple Moving Average. The Slow Stochastics are just about overbought in the downtrend and the MACD still has its lines below the “zero line”. These are all bearish implications which happen to also match the fundamental outlook. That comes as no shock because it’s the fundamentals that produce technical trends. 

The U.S. Dollar Index Downtrend Likely to Continue on Weak Fundamentals!

Note: This is my opinion and you should do your own analysis to see if it confirms my findings.

Lately, I’ve been talking about the dollar’s decline…and so far, I’ve been right. However, the last few days in the market has gotten some traders to question their positions and its even scared others out of their positions. Not me! Here’s why…

Nothing has changed in the fundamental picture to warrant a true “dollar rally” that would change the dollar’s downtrend back into an uptrend. Trends in currencies don’t change often, and that’s because the fundamentals behind those economies don’t change directions often.

So if a “true” technical trend-change were to take place on the charts, it would be because there is an actual “fundamental stimulus” that is taking place. Yet, I don’t see anything like that on the horizon…therefore, I know that any rally upward, is simply what I call a “sucker’s rally”.

That’s a rally that traders jump into because they think a trend change is coming. Yet the trend is still downward and will remain downward due to the fundamentals.

Let’s take a look at the fundamentals for a moment and I’ll show you what I mean.

Why Money Flows to a Currency!

Money generally flows into a currency because it’s “chasing yield”, meaning that they want to place their money where it can get the most interest. However, interest rates are only high or headed higher when high inflation exists. When that happens, central banks have to raise interest rates to combat the rising inflation.

So we should look to see how the inflation numbers look in order to get a sense of where investors will be putting their money.

U.S. & Japan are “deep in deflation” right now!

You will notice that the “high inflation” places of the world are places like New Zealand, the U.K. and Australia. Now the U.K. has been printing money way too much, and so that has delayed the effects of the currency gains in the pound so far.

Here’s why the Fed won’t be raising interest rates anytime soon!

However, New Zealand and Australia have both responded fairly well lately and its due to these inflation numbers.

Now look at who is at the bottom of the list: Japan and the U.S. In fact, their inflation numbers are actually negative which means that its “negative inflation” or also known as deflation.

Now, if an economy is in deflation, is there a need to raise interest rates? NO! Why? Because there’s no inflation to fight. In fact, a bigger enemy than inflation exists…and that’s deflation.

Therefore, you can count on it being quite some time before the U.S. or Japan raise interest rates. Therefore, you can also count on money flowing away from the U.S. and Japan, generally speaking. Where will it go? To the inflationary areas of the world that will have to hike interest rates earlier and keep those rates high for a prolonged period of time in order to tame inflation so that it doesn’t get out of hand.

Since the U.K.’s interest rate is small and they are still in “printing money mode”, much of the money has found its way to Australia which has the highest interest rate of all of the industrialized countries, only to be followed by New Zealand.

This is why I believe that the dollar’s recent rally is simply a bear market rally…a sucker’s rally. You see, even bear markets have upward corrections just as any uptrend has pull backs. Everyone expects pull backs within any uptrend…but they’re shocked when a bear market rallies. I’m not!

And this is just one more bear market rally for the dollar. Therefore use these times to buy the pull backs of the inflationary currencies while shorting the deflationary currencies. This would mean buying currency pairs like AUD/USD, AUD/JPY, NZD/USD and NZD/JPY. These are the ultimate inflation vs. deflation plays right now. It doesn’t mean they will go up every day, because they won’t. But it does mean that they are the ones most likely to hold their uptrends.

The only thing that would likely reverse this scenario would be a “double dip” recession. I don’t see those cards in the deck just yet. So I’ll stick to my inflation vs. deflation play.

Now, looking to the technical side of things…the dollar remains in a downtrend as noted by the downtrend line and its declining 50 Day Simple Moving Average. The Slow Stochastics are just about overbought in the downtrend and the MACD still has its lines below the “zero line”. These are all bearish implications which happen to also match the fundamental outlook. That comes as no shock because it’s the fundamentals that produce technical trends. 

The U.S. Dollar Index Downtrend Likely to Continue on Weak Fundamentals!

Note: This is my opinion and you should do your own analysis to see if it confirms my findings.

Thankfully, there are forex cross pairs. A cross pair is essentially a pair comprised of two major currencies, neither of which is the US dollar. Some of the cross pairs you may already be familiar with are the British pound/Japanese yen (GBP/JPY), a favorite of many traders due to wide pip ranges, and the Australian dollar/yen (AUD/JPY) and New Zealand dollar/yen (NZD/JPY), which are both part of the infamous carry trade.

Other Major Cross Pairs

Another major cross pair is the Euro/Swiss franc (EUR/CHF) and British pound/franc (GBP/CHF) because the U.K. and Switzerland are so close to the Eurozone and these countries are primary trade partners of Eurozone nations.

Another cross pair worth watching is the Canadian dollar/yen (CAD/JPY) because Japan imports a lot of oil from Canada. The Australian dollar/New Zealand dollar (AUD/NZD) is another proximity trade that is worth watching. The point is you don’t need to watch every cross pair. Just stick to a few of the important ones and you’ll find plenty of opportunities to make pips.

And as these are all major currencies we’re talking about, many of the same news events that impact major pairs will also impact the noteworthy cross pairs, so if you’ve already had some success with the majors, cross pairs may just be the challenge you’re looking for to take your forex trading to the next level.

Are Cross Pairs As Risky As Exotics?

Trading cross pairs isn’t as risky as trading exotic currencies, but it is probably best to consider cross-pair trading an intermediate forex trading strategy. It’s probably advisable for new traders to wait a few months after they start trading before tackling cross pairs. Another issue to consider for traders that want to trade cross pairs is cost. Let’s say you trade in the U.S. and you’ve fund your forex account with US dollars. You decide you want to trade the GBP/JPY, but since the dollar isn’t involved and your account is denominated in your dollars before you enter that trade, you have to use dollars to buy pounds. Once you’ve bought the pounds through your forex broker, you can enter the GBP/JPY trade, but that also means you’ve paid two transaction costs instead of one.

Now that you know the usefulness of cross pairs, you’ll have to find a forex robot that will allow you to trade them. Every good forex broker will allow you to trade cross pairs, but do some shopping when it comes to the forex robot because most forex robots will only let you trade dollar-based pairs, at least on the default settings. See if your forex robot’s settings can be manipulated to trade cross pairs.

Cook Islands located in South Pacific Ocean lie north-east of New Zealand. The fifteen islands grouped into Southern Cook Islands and Northern Cook Islands have a land mass of 240 square kilometers. These coral atolls enjoy moderate tropical climates along beautiful shorelines where beaches and tropical mountain scenery abounds.

The Islands inhabited by Polynesian people were discovered by European mariners around 1595. British navigator James Cook arrived here in 1773 after whom the Islands got named.

This British protectorate was transferred to New Zealand in 1901. Today Cook Islands are independent “self-governing in free association with New Zealand”. Both English and Maori are official languages. The main population is located on Rarotonga Island that has an international airport.

Tourism brings about a hundred thousand visitors annually. With no specific high or low season, the sun shines all year round on simple friendly folk settled here who are hospitable by nature. Hotels abound and rates are usually steady throughout the year. Cook Islands have cheap hotels with reasonable facilities that you can look for, to enjoy a Polynesian holiday.

Cook Islands is a self-governing group of islands. This wonderful place is situated in Polynesia. It lies within the middle of the Pacific Ocean. Cook Islands hotels are abundant in the area for there are a lot of visitors that want to see its beauty. Tourists and locals choose to spend their vacation here because of its warm, inviting and relaxing ambiance. In addition, this place is sometimes referred to as “Hawaii’s down under” for it reminds elderly visitors of the island of Hawaii when it was still underdeveloped. You may find some Cook Islands cheap hotels in the area that is perfect for vacationers on a tight budget as well as for backpackers seeking a memorable adventure.

Aside from numerous budget hotels in Cook Islands, there are also numerous places of interest that can make your stay more enjoyable and interesting. This site is divided into 2 regions namely the Southern Cook Islands and the Northern Cook Islands. The southern part is mostly composed of hilly and volcanic islands as well as a few atolls. The main base of the southern area is concentrated within 2 main tourist destinations which are Aitutaki and Rarotonga. On the other hand, the northern area of Cook Islands is closer to the equator and has low coral atolls which are also famous for tourists. It is also in free association with the country New Zealand.

Cook Islands Cheap Hotels

Tianas Beach Villas – This particular cheap accommodation in Cook Islands is located within the South Pacific. It lies within a stretch of sand on the southern area of the Muri Beach. It has 5 very appealing villas or unites that are set away from the road so it creates a serene ambiance. It is directly on the wonderful sweep of the beach. This hotel has an “adult only policy” so this may be a good vacation destination for couples and newly weds. Laundry service and basic amenities are provided for free. People can enjoy kayaking and doing other fun beach activities. Beach bungalows cost about NZD 150 while studio units cost NZD 120 per night. This is considered as one of Cook Islands cheap hotels.

Kia Orana Bungalows – This Cook Islands budget hotel is located on a picturesque beachfront. It lies on the southern end of a small village called Arorangi within the western coast of Rarotonga. It has 4 bungalows that are set on a family-owned land beside the beach. It is just 12 minutes away from Cook Islands airport. This is also one of the top Cook Islands cheap hotels.

There are some currencies known in financial circles as “commodities currencies”. Their fortunes seem to be rising an falling in tandem with prices of raw materials. These are the “other dollars” CAD, AUD and, to a smaller degree, NZD.

These countries are large producers and net exporters of a wide range of physical commodities. Oil and gas, metals, forestry and a myriad of agricultural products are imported from those countries by the rest of the world, especially exploding Asian economies. Growing consumption is followed quickly by rising prices of those materials. That, in turn, pushes currencies in exporting countries to appreciate in value.
Huge run ups in AUD, CAD and NZD over last few years were the direct result of this phenomenon.

Than there is Russia. Since the break up of Soviet Union and virtual collapse of its economy, a lot of changes have taken place. Privatization brought much needed capital and improvement. Obsolete plants were either closed or modernized. Rising commodities prices brought Russia to the top level of world exporters in many, if not most, industrial commodities. (We will omit Russian political situation and it’s impact in this discussion.)

Second largest exporter of oil and largest exporter of natural gas. When it comes to metals they are leading producers of nickel, palladium, titanium, cadmium, tungsten. Russia ranks very high in production of copper, aluminum, steel, gold, silver and a long, long list of other metals. Same with timber. One must also remember that only a small portion of natural resources there has been tapped or even properly surveyed. In a few short years Russian foreign currencies reserves grew from about 70 Billions to well over 400 Billions at this writing and growing.

Russian Ruble(RUB) responded very favorably to these events. It appreciated in value against USD from 32/$ to 25/$ since 2004. Granted, it’s not a fully free traded currency. Very few brokers offer it, spread is wide. Definitely not an instrument for active trading. Lack of historical data makes it difficult to set targets and conduct any meaningful technical analysis. It is, however far more accessible and more freely floating then Chinese Yuan.

Long term traders, with a taste for the exotic, might want to pay attention to RUB. With volume steadily on the rise and growing need for raw materials, who knows? Perhaps in 5-6 years it will achieve the stature of NZD or even AUD.

First, let’s take a look at the carry trade. In short, the carry trade is used when an investor or speculator is attempting to capture the price appreciation or depreciation in a currency while also profiting on the interest differential. Using this strategy, a trader is essentially selling a currency that is offering a relatively low interest rate while buying a currency that is offering a higher interest rate. This way, the trader is able to profit from the differential of interest rates.

With the introduction of the carry trade , yen currency pairs have become the speculator’s preference. Currency crosses like the GBP/JPY and NZD/JPY have been able to net small intraday or even longer term profits for the currency trader as speculation continues to support the bid tone. But how can one enter into a market that is already seemingly overheated? Even if a trader could, what would be a good price, and doesn’t everything that goes up come down? The answer is easier and simpler than most believe. In this article we’ll show you how to use carry trades to profit from overwhelming market momentum.

A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates – which can often be substantial, depending on the amount of leverage the investor chooses to use.

For example, taking one of the favored pairs in the market right now, let’s take a look at the New Zealand dollar/Japanese yen currency pair. Here, a carry trader would borrow Japanese yen and then convert it into New Zealand dollars. After the conversion, the speculator would then buy a Kiwi bond for the corresponding amount, earning 8%. Therefore, the investor makes a 7.5% return on the interest alone after taking into account the 0.5% that is paid on the yen funds.

Now on the earning side of the trade, the investor is also hoping that the price will appreciate in order to make further gains on the transaction. In this case, anyone that has invested in the NZD/JPY trade has been able to reap plenty of benefits.

The first wave of carry trade started in the late 1980s when financial speculators borrowed in yen and invested in European securities. This first phase ended in 1993 after the Japanese bubble collapsed, Japanese investors retreated home and the yen appreciated.

The second round of carry trade began in the summer of 1995 and ended in late 1998 after Russia defaulted, the Long-Term Capital Management hedge fund collapsed, and the Japanese government planned to recapitalize the distressed banking sector. The yen rose 15% against the dollar in a week.

The recent wave of the yen carry trade is built on the Japanese government’s policy of keeping its interest rate and currency low in order to export its way out of recession and deflation. It has continued until (10-17 August) when the yen jumped 10% caused by the default in sub-prime mortgages and the knock-on effects on equity markets worldwide.

Over the past five years, official interest rates have been lowest in Japan and Switzerland, and the yen and the Swiss franc are the most commonly cited funding currencies (Graph 1). The Australian dollar, the New Zealand dollar and sterling have appreciated steadily and have been cited as popular target currencies, although a number of other currencies are often used as well (eg the Brazilian real and the South African rand). Since 2004, with the normalization of policy rates from historically low levels, the US dollar has moved from being a funding currency to a potential target.

The carry-to-risk ratio is a popular ex ante measure of the attractiveness of carry trades. It adjusts the interest rate differential by the risk of future exchange rate movements, where this risk is proxied by the expected volatility (implied by foreign exchange options) of the relevant currency pair. By this measure, carry trade positions that were short yen and long target currencies such as the Australian dollar were increasingly promising from 2002 to 2005.

Graph: 1

Sources: Bloomberg; JPMorgan Chase; national data; BIS calculations

These positions have remained so on average, despite two bouts of higher volatility which led to significant, albeit temporary, declines in the attractiveness of some target currencies (eg the South African rand).Over the longer term, however, the attractiveness of carry trades relative to other investments is less clear (Burnside et al (2006)).

Risk reversals – or the price difference between two equivalently out of the-money options – potentially provide an alternative market indicator of perceived risks in carry trades. If the risk associated with carry trade returns is not generalized uncertainty about future values of the exchange rates, as the carry-to-risk measure implicitly assumes, but rather directional uncertainty, this will be more effectively captured by risk reversals calculated from out-of-the money options. A strong correlation between the two measures is apparent in Graph 1. In addition, Gagnon and Chaboud (2007) argue that movements in risk reversals tend to post-date large exchange rate movements in periods of high volatility.

One of the cornerstones of the carry trade strategy is the ability to earn interest. The income is accrued every day for long carry trades with triple rollover given on Wednesday to account for Saturday and Sunday rolls. Roughly speaking, the daily interest is calculated in the following way:

(Interest Rate of the Currency that you are Long – Interest Rate of the Currency that you are Short) x Notional of Your Position

———————————————————————–

No of Days in a Year

For example one lot of NZD/JPY that has a notional of 100,000, we compute interest the following way:

(.8 – 0.005) x 100,000 = approximately $20 a day

365

It is important to realize that this amount can only be earned by traders who are long NZD/JPY. For those who are fading the carry, interest will need to be paid every day.

At present in this currency rising trend, how can a trader really capture market profits in the bull market? One such formation that has proved to be a great setup may be the all too familiar, flag and pennant formations. This has been especially useful in carry currency crosses such as British pound/Japanese yen and New Zealand dollar/Japanese yen. Both formations are used in similar capacities; they are great short-term tools that can be applied to capture nothing but continuations in the foreign exchange market. They are both even more applicable when the market, especially in the case of carry trade currencies, has been trading higher and higher in every session.

To get a better sense of how this works, let’s quickly review the differences between a flag and a pennant:

• A flag formation is a charting pattern that is indicative of consolidation following an upward surge in price. The name is attributed to the fact that it resembles an actual flag with a downward-sloping body (due to price consolidation) and a visually evident post. Targets are also very reliable in flag formations. Traders who use this technical pattern will reference the distance from the bottom of the post (significant support level) to the top. Subsequently, when the price breaks the upper trend line of the flag, the distance of the post will more often than not be equivalent to the next level of resistance.

• A pennant formation is similar to the flag formation – it differs only in the form of consolidation. Instead of a body of consolidation that moves in the opposite direction of the post (as in the case of a flag), the pennant’s body is simply a symmetrical triangle. Although pennants have been known to slope downward as well, the textbook formation has also been noted as a symmetrical triangle, hence the name.

Similar setups are seen in the cross currency pairs, giving the trader plenty of opportunities in the currency market, with or without dollar exposure. Taking another market favorite, the British pound/Japanese yen, let’s take a look at how this method can be applied to the chart.

In the short-term 60-minute chart in Graph 2, a typically long flag formation is coming around in the GBP/JPY currency pair. In order to establish the formation initially, it is recommended that the chartist draw the topside trend line first. This rule is a must as an initial drawing of the bottom trend line may lead to varying interpretations. Once the initial downward-sloping trend line is drawn, the bottom is a simple duplicate. Here, the trader will make sure to note a touch by the session bodies rather than the wicks in verifying the formation as true. This is to isolate only true price action and not volatility or common “noise” that may occur in the short term.

Now let’s take a look at a step by step process that will allow traders to enter on the carry trade momentum in the market. Figure 3 shows a great opportunity in the New Zealand dollar/Japanese yen cross pair. Following the complete downturn that occurred July 9 – July11, 2007, a visual burst can be seen by chartists as bidders take the currency higher over the next 48 hours, establishing a temporary top at Point A.

Source: FX Trek Intellicharts Figure 3: Following A Sharp Decline, NZDJPY Vaults Higher Off Of Support

1. After consolidation, draw the topside trend line first, completing the formation with the duplicate bottom trend line giving the chartist the flag boundaries.

2. On a sign of a trend line break, measure the distance from the bottom of the post to the top. In this instance, the bottom support of the post is 93.81 with the top at 95.74. This gives the trader a potential for 193 pips on the trade after a break of the top trend line.

3. Once there is a confirmed break of the trend line, place the entry that is at the session close or lower of the finished candle. In this case, the break occurs approximately at 95.40 with the entry being placed at that session’s close of 95.46 (Point C). Subsequently, a corresponding stop is placed five pips below the session low of 95.37. Ultimately, the position is well within normal risk parameters as it is risking 14 pips to make 193 pips.

4. Set initial and full targets. With the full move estimated at 193 pips, we get a partial distance of 96 pips (193 pips / 2). As a result, the initial target is set for 96.42 (Point B).

5. Set contingent trailing stops. Once the initial target is achieved, the overall position should be reduced by half with the rest being protected by a trailing stop set at the entry price (or break-even). This will allow for further gains while protecting against adverse moves against whatever is left. Longer term strategies will hold to the entry price as the ultimate stop, promoting a worst-case scenario of break-even.

With the pros and cons of carry trading in mind, the best way to trade carry is through a basket. When it comes to carry trades, at any point in time, one central bank may be holding interest rates steady while another may be increasing or decreasing them. With a basket that consists of the three highest and the three lowest yielding currencies, any one currency pair only represents a portion of the whole portfolio; therefore, even if there is carry trade liquidation in one currency pair, the losses are controlled by owning a basket. This is actually the preferred way of trading carry for investment banks and hedge funds. This strategy may be a bit tricky for individuals because trading a basket would naturally require greater capital, but it can be done with smaller lot sizes. The key with a basket is to dynamically change the portfolio allocations based upon the interest rate curve and monetary policies of the central banks.

The carry trade is a long-term strategy that is far more suitable for investors than traders because investors will revel in the fact that they will only need to check price quotes a few times a week rather than a few times a day. True carry traders, including the leading banks on , will hold their positions for months (if not years) at a time. The cornerstone of the carry trade strategy is to get paid while you wait, so waiting is actually a good thing.

Partly due to the demand for carry trades, trends in the currency market are strong and directional. This is important for short-term traders as well because, in a currency pair where the interest rate differential is very significant, it may be far more profitable to look for opportunities to buy on dips in the direction of the carry than to try to fade it. For those who insist on fading AUD/JPY strength for example, they should be wary of holding short positions for too long because with each passing day, more interest will need to be paid. The best way for shorter term traders to look at interest is that earning it helps to reduce your average price while paying interest increases it. For an intraday trade, the carry will not matter, but for a three-, four- or five-day trade, the direction of carry becomes far more meaningful.

Non-farm payroll (NFP) number is being released today at the exact same time that ECB President Trichet begins his press conference, which means that we could see unusual volatility at the morning of US hours. The ECB press conference and the Non-farm payroll report will either neutralize each other or be a toxic combination for the US dollar.

Trading the Non-farm payroll is usually very difficult given the inherent volatility of the currency pair but given the 2 big event risks – the ECB rate decision and the NFP release.

The market currently expects a bad number, so a negative non-farm payrolls report will not be enough of a surprise. The current forecast calls for 60k jobs to be shaved off US payrolls. If payrolls come any where near -90k, the dollar would collapse against the Euro as the market questions the viability of a 2008 rate hike by the Federal Reserve. If payrolls on the other hand are better than -40k, it suggests that the labor market is bad but not as bad as everyone may have feared, which would be dollar positive.

Currently I am holding 2 forex positions:
1. Shorted 100,000 NZD/USD at 0.7605, stop at 0.7645, target level at 0.7570.
Current price is 0.7604, unrealised gain is US$6.

2. Bought 100,000 USD/CHF at 1.0154, stop at 1.0120, target level at 1.0200.
Current price is 1.0159, unrealised gain is US$58.22.

Since I do not know the outcome Non-farm payroll and the ECB press conference, there are a few ways to reduce my risk:
a) I can close my positions before the announcement can miss out the opportunity to profit when my initial view is correct.
b) I can adjust my stop closer to my cost level but the great volatility from post NFP announcement can easily trigger stop to my positions.
c) I can hedge my position using binary options.

Binary option trading platform: IG Markets.

1. Since I had shorted NZD/USD, I had bought Over for the binary option. So this means that in the situation that NZD/USD rises, I lost money from my convention forex position, at least I still win some money from my binary option.

I had bought US$80 for NZD/USD Over trade for Daily expiration, strike price is 0.7649, odds is 3. This means if NZD/USD goes above 0.7649 by 5am China time, I will win US$240. If not I will lose US$80, but I may gain much more from my forex position.

2. I had done the same for USD/CHF. Since I had bought NZD/USD, I had bought US$80 Under for the binary option. So this means that in the situation that USD/CHF falls, I lost money from my convention forex position, at least I still win some money from my binary option.

I had bought US$80 for USD/CHF Under trade for Daily expiration, strike price is 1.014, odds is 1.78. This means if USD/CHF goes below 1.014 by 5am China time, I will win US$142.40. If not I will lose US$80, but again I may gain much more from my forex position.

Official website: TradingEducationProgram.org