Tuesday, October 7, 2008

Carry Trade Musings

Did you see the carry trades collapse today?

Neither did I.

In fact, things looked downright orderly. Nay, they looked rational. Is this a trick or have all the truly skittish abandon ship at this point?

Be warned, I'm almost always too quick to look past current issues, discounting the ability of the current situation to cause additional convulsions before passing. However, with that said, I'm getting interested in the carry trades.

The AUDJPY, for example, has a lot of retail appeal in Japan. Over time the rate of return during rational market periods is very attractive. There is always a small but consistent upward pressure in this pair.

Both the 1hr and the 3hr charts (Oanda has a 3hr instead of 4hr time frame) could be interpreted as ready for an upward spike. Think I'm nuts? Then get ready for a downward spike.

Just keep in mind that carry trades wind up fairly slowly, most of the time, and unwind with great speed. Your opportunity for quick profit comes with panic and unwinding.

UPDATE: Now, Wednesday morning, we see a recent carry trade meltdown and coordinated rate cuts. Once again I feel compelled to point out that you might just be able to reverse my opinions and be profitable...

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