How does the CARRY TRADE work? | Class with ALEJANDRO WONG
Alejandro Pérez Wong, CEO of AUDIOMERCADOS, explains how a currency CARRY TRADE works. It's a strategy used in Forex trading. Don't miss the complete La Factoría class at the Trader Club.
The carry trade is the profit of that difference. You have made a margin on a trade without doing anything. If you earn 2.2% on just one trade, you return your capital and the fund has gained 6.5%. This is a perfect carry trade.
There are traders who try to take advantage of the fact that a countr...
Read moreThe carry trade is the profit of that difference. You have made a margin on a trade without doing anything. If you earn 2.2% on just one trade, you return your capital and the fund has gained 6.5%. This is a perfect carry trade.
There are traders who try to take advantage of the fact that a country has very low interest rates and central banks with a higher interest rate.
For example: the United States, with a 2% interest rate and in Europe at 0%. I decide to do my carry trade: ask for a loan in euros: € 1,000,000 (at 0%) and transfer it to dollars (with whatever interest rate: in this case, at 1.10%) I deposit it in an American bond to 2, 5 or 10 years and they pay me 2%. When this bond expires, I get my money back because the American Treasury pays you yes or yes, I get my money back and the accrued interest. I change it back to the currency and repay the loan I had. The carry trade is the profit of that difference, "you have gained a trading margin without having done anything". You run a risk, as the situation can change. Interest rates can rise in Europe and this causes the reverse effect.
In 2019, the North American Federal Reserve was raising rates, 25 basis points and in Europe it was at 0%, flat. It was a very good time to be able to raise a carry trade.
There have been other cases, especially with the yen, in Japan. Traditionally rates have been, for much longer than in Europe, at 0%.
Another example of carry trade (more theoretical) with the yen / dollar currency, which is priced at 108 yen for every dollar. Since interest rates are lower in Japan, we will borrow in yen and invest in dollars.
We borrow 2,000,000 yen to pay back within a year, at an interest rate of 0% (they will charge a little more). With those 2,000,000 yen we buy dollars at the exchange rate of 108 yen per dollar, we get 18,519 dollars.
With the dollars we buy an American bond with a maturity of one year, which will give us 2.2% at maturity.
It is mainly used in those investment funds, which prefer not to take a greater risk in an operation with high speculation, and with the carry trade, which are generally easier to operate (and under a macroeconomic scenario that does not change abruptly). gets a 2.2%.
It also happened in Australia and New Zealand. For many years, operations were carried out that were won every month, they paid you “a swap” which is the difference between the exchange rate between one currency and another.
Another example for TIRI: I ask the bank for money in Japan, they leave it at 0% and I change it to Mexican pesos and also, I buy a Mexican bond (Mexico is a solvent country that will pay) that pays 6.5%. You can imagine the benefit. With money at 0, they will pay me 6.5. If nobody spoils this balance during the time that the bond is, 6.5% will be obtained, your capital is returned and the fund has gained 6.5%! It is a perfect carry trade.
The risk assumed with a carry trade can be a brutal crisis or situations that go out of the ordinary.
Question: So this will have to be for medium timeframes? Answer: for medium-long. It is not for scalping or pics, but they were made with currency. For example, you look for the currency cross that has the largest possible difference, buying the currency with the highest interest rates, we buy the dollar and sell the euro. Every day the broker has to settle the exchange rate between one and the other, and they pay you the swap.
For many years this was done with Australian coins and money was made every day. Likewise, your trade was losing money, but the broker had to pay you your swap every day, due to the exchange rate. And if in addition, nothing macroeconomic had changed, it was perfect, it was a brutal move.
Now, central banks try to go hand in hand, that is why the FED (which was ahead of time), has had to slow down to avoid these gaps, since there cannot be such an aggressive gap, although it can happen in moments punctual.
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