How i knew the Carry Trade was over! | Forex Factory

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How i knew the Carry Trade was over!

  • #1
  • First Post: Mar 4, 2007 10:39am Mar 4, 2007 10:39am
Thank You all for the nice email msgs about correctly calling the end to the carry trade. I don't take full credit or think that I am some genius for figuring this out. It was a matter of time and their were many warning signs.

1. Regular folks talking about " What is a carry trade"
2. " If carry trade is wrong, I don't want to be right!"
3. " I can just hold for 2 yrs, I don't care if it goes down 1,000 pips"

Just a few clues...

EUR/JPY at 160 is a real issue for the EU...
Constant warnings that the carry trade will unwind very quickly.
This means get out now while your ahead...
COT reports.. everybody short Yen.

To me the warnings could not have been more clear. It's impossible to pick the top. But you could have sold into strength as recommended. Hope all came out well...

Ro
  • #2
  • Mar 4, 2007 10:57am Mar 4, 2007 10:57am
What do you mean the carry trade is over? Last I checked 116.00 wasn't exactly new lows. The eurjpy is still above 150.00 which was meant to be a major level for the ECB. I'm not saying the yen will weaken or strengthen but to call an end to the carry trade after a pretty standard correction is presumptious.
  • #3
  • Mar 4, 2007 11:02am Mar 4, 2007 11:02am
Feb. 12 (Bloomberg) -- The yen will strengthen against the euro as central banks raise interest rates because of global economic growth, according to Morgan Stanley.
The yen, trading near its record low of 158.99 per euro, will rebound to 150 per euro in May, according to a research report today. The currency has declined 6.8 percent against the euro and 4.8 percent versus the dollar in the past six months as investors borrow in Japan to finance purchases of higher yielding assets elsewhere, a transaction known as the carry trade.
The Japanese currency snapped a four-day slump today versus the euro after financial ministers and central bankers at the meeting of the Group of Seven nations warned against making ``one-way bets'' on the yen. Morgan Stanley also said expectations for Japanese growth and higher interest rates by the Bank of Japan have been lowered too much.
``We remain of the view that 2007 should see carry fade as a major'' foreign exchange market theme, Sophia Drossos, a currency strategist at Morgan Stanley in New York, wrote. As central banks in major developed countries continue raising borrowing costs, squeezing the market liquidity, it will ``prompt some reassessment about the cost-benefit of carry trades.''
Morgan Stanley is recommending that that investors initiate a short euro versus yen trade, or a bet that the common currency will decline. Drossos didn't immediately return a call seeking further comment.
``One-Way Bets''
Japan's currency rose to 158.06 per euro at 4 p.m. in New York, from 158.31 on Feb. 9. The yen traded at 121.93 per dollar from 121.71 on Feb. 9, after earlier dropping to an intra-day low of 122.10, close to the weakest in more than four years at 122.19 on Jan. 29.
The yen fell to the record low against the euro in Asian trading session today after officials at the G-7 meeting in Germany this weekend stopped short of criticizing the yen weakness. The G-7 group, includes the U.S., Japan, Germany, the U.K., France, Italy and Canada, met on Feb. 9-10.
European Central Bank President Jean-Claude Trichet said Feb. 10 that the G-7 group ``want the market to be aware of the risk in one-way bets, in particular on the foreign-exchange markets.''
The Bank of Japan last month kept its overnight lending rate at 0.25 percent, the lowest among industrialized nations. It compares with the Federal Reserve's 5.25 percent and 3.5 percent from the European Central Bank.
Investors should bet the yen to gain against the euro also because the economic growth in the 13-nation euro zone may slow down, according to Morgan Stanley.
T
  • #4
  • Mar 4, 2007 11:09am Mar 4, 2007 11:09am
Though the Yen has gained a lot of strength, starting actually in early January, I wouldn't conclude that carry trading is over yet. As long as the interest rates are stacked in favor of carrying, there will always be that desire.

Let it play out for a few more weeks, if JPY goes up across the board this week ... then you may be onto something. Look at the daily charts.
The market is my nation. Traders, my family. Hello, brothers and sisters!
  • #5
  • Mar 4, 2007 11:15am Mar 4, 2007 11:15am
I would say it's too early to say it's over. Compared to the retracements that have happened previously last weeks move is nothing.
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  • #6
  • Mar 4, 2007 11:22am Mar 4, 2007 11:22am
March 31st marks the end of the Japanese fiscal year, and by law all Japanese exporters must return all overseas profits back to Japan. This transaction is not done simply through a bookkeeping entry, but requires actual forex transactions to purchase Japanese Yen. If the US dollar shows any weakness or fails to sustain its rally over the 120.00 level, Japanese exporters could be forced to accelerate the repatriation process in the early portion of the trading month. Here key breech of FX technical levels in USD/JPY or EUR/JPY cross could add fuel to the unwinding of the carry trade components. As one carry trade unwinds, the investments that contributed to the carry could face pressures and a high volatility cycle of events could unfold.
T
  • #7
  • Mar 4, 2007 11:43am Mar 4, 2007 11:43am
Quoting faure
What do you mean the carry trade is over? Last I checked 116.00 wasn't exactly new lows. The eurjpy is still above 150.00 which was meant to be a major level for the ECB. I'm not saying the yen will weaken or strengthen but to call an end to the carry trade after a pretty standard correction is presumptious.
LOL.. Maybe you should see my email box. A correction of 1000 pips is a liqidation of the carry trade. What more do you need to see. No one said new lows were being made! When will you believe when GBP/JPY is at 200 or is the carry trade still on?

Seperation of Forex & Church please..
  • #8
  • Mar 4, 2007 12:10pm Mar 4, 2007 12:10pm
In order for carry trades to be worthwhile, the pair has to be rising or ranging with sideways but no significant downward movement.

Things to keep in mind:
1. most of the big players who represent the bulk of the carry trade have been long since before 206 and 110. Thus any move down does not hurt them. They just continue collecting the rollover and show a little less profit from the trade itself. No problem for them.

2. in order for the yen crosses to go up they have to periodically fall like a rock, at which point knowledgeable carry traders get out while it falls and wait for it to hit bottom before getting back in long again. If they want they can take short positions, accept the loss of the rollover and collect on the trade itself.

3. as I was basically saying in 2 above, nothing can go up indefinitely and in order for these pairs to continue going up over the long term, they first have to drop so that they can again go up. If you look back, this has already happened several time before.

Unless the BOJ raises rates a whole lot more than has already been discussed, the carry trades will remain alive and well but just on hold for the moment while a new bottom gets established for them to rise from. Based on past experiences this could take months to years. The fall of UJ from 160 to under 80 took over 5 years. The fall from 262.8 to 121.3 took almost 3 years. Long term viable carry trades could possibly be history for the immediate future, or maybe not. I wish I had not dropped my crystal ball.
  • #9
  • Mar 4, 2007 12:17pm Mar 4, 2007 12:17pm
Quoting JokersWild
March 31st marks the end of the Japanese fiscal year, and by law all Japanese exporters must return all overseas profits back to Japan. This transaction is not done simply through a bookkeeping entry, but requires actual forex transactions to purchase Japanese Yen. If the US dollar shows any weakness or fails to sustain its rally over the 120.00 level, Japanese exporters could be forced to accelerate the repatriation process in the early portion of the trading month. Here key breech of FX technical levels in USD/JPY or EUR/JPY cross could add fuel to the unwinding of the carry trade components. As one carry trade unwinds, the investments that contributed to the carry could face pressures and a high volatility cycle of events could unfold.
Do I smell 1000 pips in the pipeline?
  • #10
  • Mar 4, 2007 12:49pm Mar 4, 2007 12:49pm
Quoting moonchild
In order for carry trades to be worthwhile, the pair has to be rising or ranging with sideways but no significant downward movement.

Things to keep in mind:
1. most of the big players who represent the bulk of the carry trade have been long since before 206 and 110. Thus any move down does not hurt them. They just continue collecting the rollover and show a little less profit from the trade itself. No problem for them.

2. in order for the yen crosses to go up they have to periodically fall like a rock, at which point knowledgeable carry traders get out while it falls and wait for it to hit bottom before getting back in long again. If they want they can take short positions, accept the loss of the rollover and collect on the trade itself.

3. as I was basically saying in 2 above, nothing can go up indefinitely and in order for these pairs to continue going up over the long term, they first have to drop so that they can again go up. If you look back, this has already happened several time before.

Unless the BOJ raises rates a whole lot more than has already been discussed, the carry trades will remain alive and well but just on hold for the moment while a new bottom gets established for them to rise from. Based on past experiences this could take months to years. The fall of UJ from 160 to under 80 took over 5 years. The fall from 262.8 to 121.3 took almost 3 years. Long term viable carry trades could possibly be history for the immediate future, or maybe not. I wish I had not dropped my crystal ball.
Okay lets say you were long at GBP/JPY 206... then you sold at 236 made 3000 pips off the move up + carry interest. Cool right? Now if you hold forever and have stop loss at 206 ( your entry). You only made interest when at some point it retraces back to 206. Was it worth it to hold it for 3 years and just collect interest? You could have sold out made the sure pips and move on to real trading. Inaction will cost you lots of money. When the going is good you get out.. When the trade gets hard you exit... Holding for interest alone is just plain silly. Don't learn this lesson the hard way...
  • #11
  • Mar 4, 2007 12:59pm Mar 4, 2007 12:59pm
Quoting Rolandlc33
Okay lets say you were long at GBP/JPY 206... then you sold at 236 made 3000 pips off the move up + carry interest. Cool right? Now if you hold forever and have stop loss at 206 ( your entry). You only made interest when at some point it retraces back to 206. Was it worth it to hold it for 3 years and just collect interest? You could have sold out made the sure pips and move on to real trading. Inaction will cost you lots of money. When the going is good you get out.. When the trade gets hard you exit... Holding for interest alone is just plain silly. Don't learn this lesson the hard way...
Actually, the gain from the interest over 3 years and the amount you could have made from a 3000 pip price increase are virtually identical. I find a 5% or less difference between the 2. Add to that that the pair could take quite a while to drop back to 206 or so.

The individuals who are involved in carry trade are not interested, by and large, at least the ones I know, in trading. Their only interest is investment. Some prefer to hold onto their carry trades even if the price goes below their entry by hedging, and there are various ways of accomplishing that. As a result of this, there are people who will continue with their carry trades even if the pair falls down a well.

You are thinking like a trader, but many of them are not traders, at least not in the sense that most of us are.
  • #12
  • Mar 4, 2007 2:24pm Mar 4, 2007 2:24pm
Quoting moonchild
Actually, the gain from the interest over 3 years and the amount you could have made from a 3000 pip price increase are virtually identical. I find a 5% or less difference between the 2. Add to that that the pair could take quite a while to drop back to 206 or so.

The individuals who are involved in carry trade are not interested, by and large, at least the ones I know, in trading. Their only interest is investment. Some prefer to hold onto their carry trades even if the price goes below their entry by hedging, and there are various ways of accomplishing that. As a result of this, there are people who will continue with their carry trades even if the pair falls down a well.

You are thinking like a trader, but many of them are not traders, at least not in the sense that most of us are.
Fair enough... but isn't this a traders forum? I understand your point and it's well taken. But if you just want interest... Buy NZD/JPY collect the interest... hedge in an account that doesn't charge you and bang you got exactly what you need. No need to even worry... but thats not trading and you can earn better interest elsewhere... but to each his own.

Ro
  • #13
  • Mar 4, 2007 2:32pm Mar 4, 2007 2:32pm
Quoting Rolandlc33
Fair enough... but isn't this a traders forum? I understand your point and it's well taken. But if you just want interest... Buy NZD/JPY collect the interest... hedge in an account that doesn't charge you and bang you got exactly what you need. No need to even worry... but thats not trading and you can earn better interest elsewhere... but to each his own.

Ro
What you are talking about with hedging in a different account isn't exactly an easy thing. No broker (unless I have been lied to by those that try to hide them) will allow you to hold 10-20 standard lots open in a negative 6% interest position for extended periods of time.

Although, that is hearsay.
The market is my nation. Traders, my family. Hello, brothers and sisters!
  • #14
  • Mar 4, 2007 2:38pm Mar 4, 2007 2:38pm
Quoting StockKJay
What you are talking about with hedging in a different account isn't exactly an easy thing. No broker (unless I have been lied to by those that try to hide them) will allow you to hold 10-20 standard lots open in a negative 6% interest position for extended periods of time.

Although, that is hearsay.
Your ill informed... Yes their are brokers that allow this. Do a bit of research i assure you it's possible.
  • #15
  • Mar 4, 2007 2:47pm Mar 4, 2007 2:47pm
Quoting faure
What do you mean the carry trade is over? Last I checked 116.00 wasn't exactly new lows. The eurjpy is still above 150.00 which was meant to be a major level for the ECB. I'm not saying the yen will weaken or strengthen but to call an end to the carry trade after a pretty standard correction is presumptious.
LOL.... this guy is in serious denial. Read the article below it might clue you in to what the market is saying. I guess everyone is wrong the carry trade is not unwinding. I assure you people would gladly exit at 500 pips higher if given the chance again. Okay im presumtious and so is everyone else that believes the same...

Carry Trade Unwinding Roils Currency Markets


NEW YORK (MarketWatch) -- A sharp rally in the yen and the Swiss franc on Tuesday serves as a reminder of the risk of a massive unwinding of carry trade positions.

Carry trade refers to the practice of speculators borrowing or selling lower-yielding currencies such as the yen or the Swiss franc at low costs and reinvesting in higher-return currencies and assets, such as the New Zealand dollar, the British pound and the South African rand.

The yen climbed almost 1.8% against the dollar, the euro and the British pound on Tuesday. Against the Australian dollar and the New Zealand dollar, the Japanese currency surged 2% and 3%. Interest rates in Australia and New Zealand are among the highest among major economies.

Meanwhile, emerging-market currencies slumped with the Turkish lira off almost 2%, the South African rand down 1.6% and the Brazilian real 1.4% lower versus the U.S. dollar. The Icelandic krona fell 1.1%.

"What you have to remember is the carry trade has really gotten to extreme proportions," said Brian Dolan, direct of research at Forex.com, a division of Gain Capital. "It's an extremely risky trade."

"One of the things that carry trade relies on is relative low levels of volatility. Clearly the most recent catalyst has been the Chinese market meltdown triggering a meltdown in other emerging markets and basically a shift out of riskier assets into less risky assets."

The carry trade has pushed the yen to a two-decade low on a trade-weighted basis early this year. Japan's low interest rates, which now stand at 0.5% and are the lowest among all major economies, have made the yen a popular funding currency.

The almost-free borrowing costs of the yen have also been responsible for financing massive bets in a variety of high-risk markets such as commodities and emerging markets. The carry trade is expected to be reversed as the Japanese economy strengthens and prices begin to rise.

"The increase in carry positions risks the development of a bubble in these positions, which could be very destructive if it implodes," said Steve Barrow, chief currency strategist at Bear Stearns.

The unwinding begins

Investors' risk appetite fell sharply in recent sessions on fears of the potential knock-on impact from subprime lending market woes and worries over Iran's nuclear plans. An almost 10% slump in Chinese shares overnight also encouraged traders to further unwind carry trade positions.

"Risk aversion is rocketing today," said Lars Christensen, an analyst at Danske Bank. This "is self-reinforcing at the moment, as the yen and the Swiss franc, which are the traditional funding currencies [in carry trades], are strengthening significantly."

The massive build-up of carry trades over the past many years has led officials and economists to worry that a sharp reversal of these positions would have significant negative impact on financial markets.

There are no official statistics on the size of the carry trade. Some economists estimate the total size could range from $200 billion to as high as $1 trillion.

Rodrigo Rato, head of the International Monetary Fund, warned on Tuesday that carry trades "could lead to more entrenched exchange rate misalignments that worsen global imbalances."

Rato also said that while the size of carry trades was unknown, there was no "simple solution" to the problem. He warned that financial markets and countries would be exposed if there was a sudden unwinding of financial flows.

G-7 warns of risk

Meanwhile, at the meeting of Group of Seven finance ministers and central bankers earlier this month, European Central Bank President Jean-Claude Trichet warned about the risks of carry trades, stating that "we want the markets to be aware of the risks in one-way bets, particularly on the foreign exchange market."

The official G7 communiqué didn't make any specific reference to weak yen.

Stephen Lewis, an analyst at Insinger de Beaufort, said "it's far from clear to what extent markets are taking it for granted that a weak yen, with low yen interest rates, will persist indefinitely."

"If investors noted merely a tendency on the yen's part to appreciate, they might well rush to exit from investments supported by yen borrowings," he said, in a note.

Danske Bank's Christensen said if investors' risk perceptions continue to rise or the current concerns over issues like Iran and the US sub-prime mortgage market continued to grow, higher risk emerging market currencies could be hit hard.

Investors should "stay away from the carry trade, stay away from any of these markets," said David Solin, a partner at Foreign Exchange Analytics. "There are a lot of risks built into them."
  • #16
  • Mar 4, 2007 2:51pm Mar 4, 2007 2:51pm
If you could make $100k+/year just by hedging and transfering some money... I think everyone would do it. But I will look into it again. Just doesnt seem realistic.
The market is my nation. Traders, my family. Hello, brothers and sisters!
  • #17
  • Mar 4, 2007 7:37pm Mar 4, 2007 7:37pm
I can't seem to understand why would anyone carry trade.
4% a year is not attractive at all. You can get better and safer from fixed deposit.
Maybe you can amplify the profits by using leverage. To make money carry trading you need to
1) Use leverage
2) Use big stop loss to protect yourselves from market noise.

It's tricky because the greater your leverage, the smaller stop loss that you can use.

If you find the "sweet spot", the risk is still too great. If the Stop Loss got hit, you may lose more than what you earned from interest. 4% a year is not that big. It's very slow as well. Volatile currency fluctuates 1% of it's value every 1-2 days.

Yes, I know those JPY pair has been trending up for a long time. You will get the capital appreciation as well as interest. But without any plan to secure the capital gain, you will not truly gain anything from the capital gain.

If you plan to secure the capital gain, that would go against your goal of carry trading ( which is to hold position long enough to accumulate interest).

LOL. Where's the logic in this ? Someone please enlighten me.
  • #18
  • Last Post: Mar 4, 2007 7:43pm Mar 4, 2007 7:43pm
Quoting StockKJay
If you could make $100k+/year just by hedging and transfering some money... I think everyone would do it. But I will look into it again. Just doesnt seem realistic.
Exactly. It may be possible, but I doubt the average joe will be able to do it.
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