Are Carry Trades Wrong? | Forex Factory

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Are Carry Trades Wrong?

  • #1
  • First Post: Feb 22, 2007 9:09am Feb 22, 2007 9:09am
Just recently I have begun to grasp the concept of carry trades. After seeing the potential amount of interest one can earn on carry trades, such as holding a long GBP/JPY, I have great interest in them.

However, I have read several articles about how certain people are concerned about the yen weakness and how some people are warning against carry trades. From what I understand carry trades with the yen may be helping the depreciation of the yen currency. So my question is, are these carry trades morally or legally wrong? What are your thoughts?
  • #2
  • Feb 22, 2007 9:37am Feb 22, 2007 9:37am
It's only morally wrong for governments to put their people in situations where us fortunate traders can take advantage of them. The arguement is that pros out weight the cons, but reality is they just want some immediate relief, even though they are going to take a big beating for a long time.
  • #3
  • Feb 22, 2007 10:23am Feb 22, 2007 10:23am
Carry trades aren't wrong at all.

Eventually, the ROI on the carry trade will evaporate so it may even out.

In trading there is no morality if you're following the rules (like not using insider information, etc).
  • #4
  • Feb 22, 2007 10:34am Feb 22, 2007 10:34am
Quoting Crestwind
Just recently I have begun to grasp the concept of carry trades. After seeing the potential amount of interest one can earn on carry trades, such as holding a long GBP/JPY, I have great interest in them.

However, I have read several articles about how certain people are concerned about the yen weakness and how some people are warning against carry trades. From what I understand carry trades with the yen may be helping the depreciation of the yen currency. So my question is, are these carry trades morally or legally wrong? What are your thoughts?
Good lord...."Morally wrong..?!!"....no no no...don't ever bring morals into the market!!!!! ..............and definitely no legal wrong in doing that....

But seriously though...carry trade is yet one more weapon in your arsenal to trade the market......and ofcourse as the market evolves you will now find brokers etc available to even a small fry like me to try their hand at carry trade potentials by the power of leveraging...

A word of warning though....leverage really is a double edged sword so the trick is to use leverage....not to over trade and have "Margie call U"...but rather as a safety net to withstand the long down-trends you may....or rather...you WILL face during the trade and accrue interest....
  • #5
  • Feb 22, 2007 10:57am Feb 22, 2007 10:57am
Don't purchase a currency just because it has a good carry value. You should choose based on fund/tech and not because of the roll rate. A years worth of carry trade interest can vaporize in a few days. With that said I do like the carry a few min. before the roll on wed. You can almost beat the spread so it's worth the risk.

Lastly the carry sure feels safe right now.. So that makes me very nervous. If you can walk away and not use stops then something is wrong. I don't see a reason yet for an unwinding in carry trades but it just feels too easy. I will be selling into strength here..

Ro
  • #6
  • Feb 22, 2007 11:22am Feb 22, 2007 11:22am
Hi,

I was in the GBP/JPY since the week of 4/23/06....I held the carry trade as a long term investment. I did get out near the top, IFR called that the Dealers where going to push 241 and than stop and unload.....so I did the same.

It was the longest I have ever held a position, I'm a day trader, or more exactly, a session trader. There is nothing wrong with taking risk and being rewarded for your efforts. Liken it to telling your bank to keep the interest on your savings, CD's, or other investments you earn interest on.

Trust this, The JPY business's are making a killing with the yen being week, not good on Fundies....same as BMW screaming the blues, about a week or 2 ago, concerning the EUR being so strong.

Maybe some one can answer this question.....why....when the USD and GBP where the same % rate, was the difference so large in the interest paid on the USD/JPY vs the GBP/JPY.

THX
Proper Prior Planning Prevents Piss Poor Performance
  • #7
  • Feb 22, 2007 11:36am Feb 22, 2007 11:36am
  •  Trader#0000
  • | Status: Unregistered Trader
Quoting FxJarhead

Maybe some one can answer this question.....why....when the USD and GBP where the same % rate, was the difference so large in the interest paid on the USD/JPY vs the GBP/JPY.

THX
I think the contract size is the answer.
  • #8
  • Feb 22, 2007 11:37am Feb 22, 2007 11:37am
  •  Trader#0000
  • | Status: Unregistered Trader
Quoting Rolandlc33
I will be selling into strength here..

Ro
Buying into weakness might be a better option.
  • #9
  • Feb 22, 2007 1:29pm Feb 22, 2007 1:29pm
..... I don't want to be right ....

Happy Trading All ....
If it is not broken, fix it until it is!
  • #10
  • Edited Feb 23, 2007 9:12am Feb 22, 2007 2:07pm | Edited Feb 23, 2007 9:12am
Thanks for your answers guys. I am just trying to understand how the markets work. I was just somewhat concerned when I read something along the lines that carry trades with yen depreciate the value of the yen and that certain people were warning the market against taking them. But I imagine that the forex markets, as a whole, are designed to produce a price for a currency based on supply and demand? Am I correct in this assumption?
  • #11
  • Edited 3:39pm Feb 22, 2007 2:57pm | Edited 3:39pm
  •  tesla
  • Joined Oct 2006 | Status: Friendly Neighborhood Programmer | 533 Posts
Selling a currency (or any commodity for that matter) for any reason will devalue it, however slightly. It will add to the "supply" side of the supply/demand equation.

There has to be a way to determine market value for the yen, and the Forex seems to be a relatively fair way to do it. To do anything other than allow market forces to evaluate the value would be artificial.

So... I don't see how selling the Yen is morally or legally wrong.

That's my opinion at least.
  • #12
  • Feb 22, 2007 3:10pm Feb 22, 2007 3:10pm
Even if the BOJ stops and the rest of the world’s central banks continue to raise rates, you can still get killed on the carry trade.

Carry trades only work when risk premiums are low, which they have been for some time now. But keep in mind that it only takes a tiny change in market perception to drive that premium beyond what any of you can imagine. The cascade effect of seemingly innocuous events on markets has been demonstrated time and again throughout history. It would be foolish to assume that another event isn't right around the corner.

If there is anything "wrong" with the carry trade it is in how little regard its participants give to the inherent risks. Take a look at what happened on Oct 6-8, 1998 and ask yourself if those 2 pips a day were worth it then...

Note:// You might think that having a stop elminates the risk, but it doesn't. Someone has to be willing to take the other side of your trade and in times of crisis that is rarely the case. Be very careful with what seems like easy money.
  • #13
  • Feb 22, 2007 3:40pm Feb 22, 2007 3:40pm
The risk in Carry Trades is: When they unwind, GBPJPY can drop more than 1000 pips in a few days!

Currently, all JPY Carry Trades currency pairs are at their historic highs; it is not safe to enter right now. SURE you might call me wrong months from now (if these pairs kept going up) - hindsights are always correct. But will you risk it?

I'd rather wait for that big time unwinding - may happen this year, next year or whenever. But when it does happen, I'd get in the ride with a BIG BOAT! (or mortgage my house for that matter... you know what I mean)
  • #14
  • Feb 22, 2007 8:10pm Feb 22, 2007 8:10pm
Quote
Thanks for your answers guys. I am just trying to understand how the markets work. I was just somewhat concerned when I read something along the lines that carry trades with yen depreciate the value of the yen and that certain people were warning the market against taking them.
When the currency is weak, the products of that country seems cheap and exports may go up and businessmen make a killing. Currency depreciation is not always a bad thing.

In economics, the coin always has 2 sides, good for one maybe bad for another. There's no morally correct/wrong in this business.
  • #15
  • Feb 23, 2007 9:03am Feb 23, 2007 9:03am
Quoting luqmanz
When the currency is weak, the products of that country seems cheap and exports may go up and businessmen make a killing. Currency depreciation is not always a bad thing.

In economics, the coin always has 2 sides, good for one maybe bad for another. There's no morally correct/wrong in this business.
I think I have a better understanding of this topic now. Thanks again to everyone that posted.
  • #16
  • Feb 23, 2007 9:29am Feb 23, 2007 9:29am
Quoting BurgerKing
The risk in Carry Trades is: When they unwind, GBPJPY can drop more than 1000 pips in a few days!

Currently, all JPY Carry Trades currency pairs are at their historic highs; it is not safe to enter right now. SURE you might call me wrong months from now (if these pairs kept going up) - hindsights are always correct. But will you risk it?

I'd rather wait for that big time unwinding - may happen this year, next year or whenever. But when it does happen, I'd get in the ride with a BIG BOAT! (or mortgage my house for that matter... you know what I mean)
Perhaps you are right about blind carrying, although it is still extremely beneficial to trade these pairs on 4hr - daily charts. You get the benefit of a solid trend as well as the interest + position.
The market is my nation. Traders, my family. Hello, brothers and sisters!
  • #17
  • Feb 23, 2007 3:47pm Feb 23, 2007 3:47pm
"241" - This is the 10 year high for this pair (Aug 98), from which he just got turned back. Watch this mark carefully; a break out clears the decks for significant future gains, which are quite possible given BOJ's now stated stance.

Carry trades not withstanding, we're watching great theater here, along with an opportunity to profit handsomely, in either direction.
They call me "Hondo"
  • #18
  • Feb 25, 2007 1:49am Feb 25, 2007 1:49am
Quoting BurgerKing
The risk in Carry Trades is: When they unwind, GBPJPY can drop more than 1000 pips in a few days!

Currently, all JPY Carry Trades currency pairs are at their historic highs; it is not safe to enter right now. SURE you might call me wrong months from now (if these pairs kept going up) - hindsights are always correct. But will you risk it?

I'd rather wait for that big time unwinding - may happen this year, next year or whenever. But when it does happen, I'd get in the ride with a BIG BOAT! (or mortgage my house for that matter... you know what I mean)
I agree with this, if you look back in time, in each of the three instances, the monthly candle immediately before the unwinding was an evening star or a doji- clear reversal signals. If the current month's candle forms some type of a reversal candle, great caution should be used in establishing long positions. Of course, it might not happen for another hundreds of pips, but there is a change of a very fast reversal.
Attached Image
  • #19
  • Feb 25, 2007 3:00am Feb 25, 2007 3:00am
That's a nasty long bearish candle from 1998!
  • #20
  • Feb 27, 2007 7:52am Feb 27, 2007 7:52am
Hows that 2.5 pips a day looking now?
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