Posted on 01/03/2015 11:14:15 AM PST by blam
DEFINITION of ‘Currency Carry Trade’
http://www.investopedia.com/terms/c/currencycarrytrade.asp
A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.
INVESTOPEDIA EXPLAINS ‘Currency Carry Trade’
Here’s an example of a “yen carry trade”: a trader borrows 1,000 Japanese yen from a Japanese bank, converts the funds into U.S. dollars and buys a bond for the equivalent amount. Let’s assume that the bond pays 4.5% and the Japanese interest rate is set at 0%. The trader stands to make a profit of 4.5% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit of 45%.
The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar were to fall in value relative to the Japanese yen, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.
Dr Copper
Well, things will be interesting right up to Sept 13th...
http://www.freerepublic.com/focus/f-religion/3211940/posts?page=31#31
Massive wealth transfer ahead: Savers, and people with little to no debt will come out on top. In general, fiscally conservative people.
The losers: anything with massive amounts of debt at just about ANY interest rate, as the real rate would easily exceed the nominal (original) rate. In general, liberals, Communists, socialists, &c.
I understand the perils of the carry trade, but I fail to understand the connection between the carry trade and oil.
If the carry trade were to wipe out the economy, I could see the connection, but as presented here I do not see the connection.
An explanation would be welcome.
Wouldn't that be hateful?
Carry Trade Bookmark
Maybe you can explain your reasoning?
It seems to me that wealth transfer has been AWAY from savers. Basically, they are getting zero (or worse) interest on their $$. This also has the effect of driving savers to riskier investments, such as the stock market. This has helped to pump up the stock market.
The US Gov has been doing quite well, because we are financing our massive deficit for almost zero. IMHO, that is what has been driving this train. IF the US had to pay reasonable interest rates on our deficit, the Entitlement State would be bankrupt quickly. The Federal Reserve has manipulated things to keep this from happening. If the stock market goes down, pension fund become insolvent and the house of cards starts to collapse
“Massive wealth transfer ahead: Savers, and people with little to no debt will come out on top. In general, fiscally conservative people.”
Maybe that is the way it should be.
But if the dollar turns into toilet paper or the banks close then savers could loose it all.
Just remember that with the suicide game that is being played by the banks and the government in the financial sector that we are all going be wiped out in the end.
This, of course, assumes that deflation is in the cards.
If hyperinflation occurs, then just about everyone is screwed. (Maybe the gold bugs were right...)
Good point. Real interest rates have been negative (i.e., inflation is greater than the return rate on savings) for a number of years. However, the author's argument makes some sense in a deflationary, rather than inflationary, environment.
If the dollar soars, you can convert it to some foreign holding... oil... castles... foreign stocks. But, here, timing becomes important.
Another caveat: Look at the dollar index, (symbol DXY on some systems). A move of plus or minus 10 percent is huge, but won't change most savers' net financial positions, because they won't know when or how to take advantage of the swing.
I skimmed, I admit — but it’s not just the appreciation of the dollar affecting the price of oil if that’s the premise.
Under that scenario, the two would just switch places - dollars become the new TP, and TP becomes the new dollars.
It’s ALL ABOUT THE US DOLLAR !!
And in fact the US Dollar should have begun this rally back in 2008.
If hyperinflation occurs, you would expect the price of commodities like oil to increase, not decrease.
I had done very well with oil from 2009 until last June. It’s been a very rough ride since them. It is STILL a significant part of my portfolio however, because:
1. Like gold, it will never be worth zero.
2. Oil companies pay good dividends. This will decrease somewhat, but it beats the interest I get in a CD.
3. The game the Saudis are playing is to shake out the field of producers. Once this happens, the price will go back up.
I still believe that, mid-long term, the US deficits will have a devastating impact on the Economy. I had thought it would kick in by now, but the Federal Reserve is doing all it can to postpone the day of reckoning. But that day will come.
If it’s “all about” anything, FRiend, it’s all about Russia. They are the “axe” in oil. Never forget it.
New dollars for TP?
O-U-C-H-!
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True. This may just be the calm before the storm. But once the excrement makes initial contact with the airfoils, the economy could go either way.
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