euro based carry trade basket

hi guys, i've been 'profitable' carry trading, earning 20% return on my account last year (partly due to luck, but i'll take it lol). a "set-and-forget" trading strategy best fits my life style, as i'm sure it does for most of us middle class service industry slaves.

my broker is oanda, so i will be referring to their interest rates on each pair. my carry basket is built on the euro, which has a mediocre interest rate making it possible to go long against certain pairs and short against others. the idea is to hedge equally to offset any appreciation/depreciation and concentrate on the income from interest.

my basket:
euro longs:
eur/cad pays 0.25%
eur/jpy pays 0.30%
eur/chf pays 0.30%

euro shorts:
eur/aud pays 2.65%
eur/nzd pays 0.65%
eur/try pays 4.75%

the return averages out to about 1.48 percent. so we leverage our way up to 40% return or so and theoretically make decent money.

any thoughts?

It certainly is nice to receive carry interest, but I think you'll find that there is a chance of monsterous volatility in the short term... pairs might not correlate very nicely for extended periods of time, significant economic events can take place that will throw your basket out (e.g. a non-euro currency you are using at some point in the trade comes out with extremely bullish or bearish news that was not expected at all) and if you are over-leveraged you may be forced out of your trade at some point.

You are also much more commodity based on the short euro side. With the commodity markets running so far in the last year, you would have made a killing on the aud eur and nzd eur, but if commodities tank on the other side you only have the cad. This isn't the only thing - its a continual economic balancing act.

I'm not saying give up but do be aware that there is a lot more to this strategy than choosing the interest rates nicely.

Best of luck. Kind regards

I like carry interest. My USD/TRY and EUR/HUF subaccount has done really well - up over 70% since August 2009.

You would do slightly better to trade the cross pairs instead of the euro pairs.

So, replace eur/aud and eur/chf with aud/chf, for instance.

Also, keep in mind that with a basket of pairs, you are likely to get hit with news that you aren't expecting since it's hard to keep track of so many markets.

I think you'd be better off to focus on one pair that earns high interest, get tuned in to the fundamental news on that pair, and take some good trades. EUR/HUF or EUR/TRY might be good candidates for you. 10x leverage would get you about 50% /yr, not counting currency appreciation.

EDIT: forgot one thing: spread volatility. EUR exotics have a wider spread on average that USD exotics at Oanda, so it will take longer for the interest payments to recover your cost of entry into the trade.

lol, i have several small oanda accounts that i experiment with. on my first carry trade account, i literally purchased every currency pair that pays interest (only pairs under 100 pip spread).

"Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing." - Warren Buffett.

Oanda is good for that kind of testing. Buying all of the interest paying pairs is not such a good idea for two reasons though: you end up heavy against JPY so you just increase your risk, and you lower your return by diversifying when you don't need to. (apropos your Buffett quote).

A better idea would be to short say AUDJPY and USDTRY. This gets you both the JPY action and the exotic carry action and lets you focus your assets on a smaller number of markets that you can keep an eye on.

Of course you probably figured this out already!

i've narrowed it down to 4 positions- 2 euro longs, 2 euro shorts

longs: eur/aud and eur/nzd

short: eur/cad and eur/chf

these pairs show very close long term correlation. i dont see many ways of achieving an extremely high return from interest with this theory, but i feel as if the portfolio leaves the account less vulnerable.

i've given up on speculating, its the sexier side to trading but i cant do it. its not easy to predict where the price is headed. it is fairly easy to predict that i'll be paid interest tomorrow evening at 4:00 and then again on saturday at 4, and again on sunday at 4, etc.

edit: yuck, less than 1% interest with those pairs =( that would result in having to use even more leverage. as far as risk goes, i guess its just 2 sides of the same coin

Looks like you have your long and short pairs backwards if you want to collect interest.

My EURHUF USDTRY account is at 8:1 leverage now and will collect $488 in interest over a year - started with $1000 in August, NAV is now almost $1700 ($100 off the high). If you want high interest, it's the way to go.

I've got protective SL on all of my in-the-money orders, so at worst I'll be 1:1 levered on USDTRY and 2:1 levered on EURHUF (maybe 3:1 if it keeps moving against me over the next week or so and I add to my position).

It's really simple. Make a low leverage initial entry. Use a SL. Move the SL to breakeven when prudent, and then start protecting profit while you collect interest.

Also, your basket will end up being some version of AUDCAD, NZDCHF, NZDCAD, AUDCHF synthetic. These pairs do move and your NAV will be affected by them.

Good luck!