Skip to main content

Carry On Carry Trades

After the slight scare with the subprime mess, which caused the USD to tumble, or more importantly causing the yen and swiss franc to rise - carry trades seem to be increasing again. The main target currencies were the Australian dollar, Indonesian rupiah, Indian rupee, New Zealand dollar and Philippine peso - i.e. carry trade was borrowing in yen or swiss franc to invest in the above mentioned currencies.

Yen-funded carry trades provided higher returns than those using Swiss franc loans because of the Asian country's lower main interest rate. The recent rise vs the USD from 120 yen to 109 yen would have scared many carry traders, but most would have been able to unwind to lock in gains. Now that the yen has stabilised, we are seeing more carry trades reopening positions because carry trades despite the inherent risks allow them to lock in 10%-12% gains per annum. For example by borrowing in yen and buying AUD, these trades can produce an annualised gain of 12%. One can borrow in yen at 0.5% and buying AUD will yield 6.5%.

In fact, if measured in volatility, these carry trades have a lower volatlity than stocks even. Of course, the danger is the sudden divergence in currency movements. The losses would be magnified if yen strengthens and AUD weakens. However, the recent risks and losses have been less than generally anticipated because when yen strengthens, the AUD and other targeted currencies also strengthen. There was only one losing currency and that is USD.

Not all carry trades are the same. The danger is the "underlying fundamentals" of the target currency. All things being equal, the following target currencies are ranked according to inherent strength in economic findamentals:

1) Australian dollar
2) Indian rupee
3) Thai baht
4) Indian rupee
5) Phillippine peso
6) Indonesian rupiah
7) NZ dollar

The lower the ranking the bigger the danger of the target currency collapsing. What carry traders don't want is a strngthening yen/swiss franc and a collapsing Kiwi dollar/ rupiah. Private investors dabbling in carry trades, do realign your strategies.

The yuan would have been the ultimate carry trade on a 6-12 months view. Borrow in yen at 0.5% and just park in yuan bonds or deposits giving you 3%-4% p.a. The beauty is the expected rise in yuan value on a 6-12 month basis. Alas, its difficult to get hold of yuan papers.

As a matter of fact, borrowing in yen and buying HKD in blue chip stocks (with 3-4% dividend yield) or good REITs would be an excellent trade on a 6-12 view. Even though USD may weaken further, thus weakening HKD owing to its USD-peg, the structural shift actually would push HKD stocks higher. Its atrade with a high level of risk though. Worth mentioning anyway.


Trade Anything said…
USD might have been the sole loser so far. But be careful, there is sign of the USD strengthening, at least against EUR.

Popular posts from this blog

My Master, A National Treasure

REPOST:  Its been more than two years since I posted on my sifu. This is probably the most significant posting I had done thus far that does not involve business or politics. My circle of close friends and business colleagues have benefited significantly from his treatment.

My Master, Dr. Law Chin Han (from my iPhone)

Where shall I start? OK, just based on real life experiences of those who are close to me. The entire Tong family (Bukit Kiara Properties) absolutely swear that he is the master of masters when it comes to acupuncture (and dentistry as well). To me, you can probably find many great dentists, but to find a real Master in acupuncture, thats a whole different ballgame.

I am not big aficionado of Chinese medicine or acupuncture initially. I guess you have to go through the whole shebang to appreciate the real life changing effects from a master.

My business partner and very close friend went to him after 15 years of persistent gout problem, he will get his heavy attacks at least…

PUC - An Assessment

PUC has tried to reinvent itself following the untimely passing of its founder last year. His younger brother, who was highly successful in his own right, was running Pictureworks in a number of countries in Asia.

The Shares Price Rise & Possible Catalysts

Share price has broken its all time high comfortably. The rise has been steady and not at all volatile, accompanied by steady volume, which would indicate longer term investors and some funds already accumulating nd not selling back to the market.

Potential Catalyst #1

The just launched Presto app. Tried it and went to the briefing. Its a game changer for PUC for sure. They have already indicated that the e-wallet will be launched only in 1Q2018. Now what is Presto, why Presto. Its very much like Lazada or eBay or Alibaba. Lazada is a platform for retailers to sell, full stop. eBay is more for the personal one man operations. Alibaba is more for wholesalers and distributors.

Presto links retailers/f&b/services originators with en…

How Long Will The Bull Lasts For Malaysia

Are we in a bull run? Of course we are. Not to labour the point but I highlighted the start of the bull run back in January this year... and got a lot of naysayers but never mind:

p/s: needless to say, this is Jing Tian ... beautiful face and a certain kind of freshness in her looks and acting career thus far

I would like to extend my prediction that the bull run for Bursa stocks should continue to run well till the end of the year. What we are seeing for the past 3 weeks was a general lull where volume suddenly shrunk but the general trend is still intact. My reasons for saying so:

a) the overall equity markets globally will be supported by a benign recovery complemented by a timid approach to raising rates by most central banks

b) thanks to a drastic bear run for most commodities, and to a lesser extent some oil & gas players, the undertone for "cost of materials" have been weak and has pr…