Carry Trade

Some interesting excerpts from a Bloomberg article I read this morning regarding the carry trade;

"The yen has slumped 4.6 percent to a 4 1/2-year low against the dollar this quarter, making it the worst performer among 72 major currencies and confounding predictions by strategists at Deutsche Bank AG and UBS AG for gains of about 1 percent.
The banks didn't reckon on the risk appetite of Japanese individuals, who are borrowing money like never before to buy currencies with higher yields. They tripled their trading in the year ended March to a record $11 billion a day, according to Tokyo-based Yano Research Institute Ltd., publisher of an annual report on the business. Globally, currency trading by retail investors rose 54 percent in 2006, according to research firm Greenwich Associates in Greenwich, Connecticut.
``Japan's interest rates are too low,'' said Hiroshi Ono, a 40-year-old sales clerk at a telephone company in Tokyo. Ono said he has made about $17,000 since March by borrowing $200,000 of yen and buying U.S. dollars to take advantage of the 4.75 percentage-point difference between Japanese and U.S. interest rates.
Japanese investors are borrowing yen at the central bank's 0.5 percent overnight lending rate and buying higher-yielding currencies in New Zealand, the U.K., Australia and even Brazil to increase returns on 1,536 trillion yen ($12.5 trillion) in savings. The strategy is called the carry trade. "

When the yen rose to a two-week high of 162.20 against the euro on May 25, Naoko Ogawa, a 34-year-old freelance writer, used a 1,000 euro ($1,300) deposit to buy 10,000 euros. She sold four days later, close to a then-record high of 164.29 yen.
``You just need to buy the dollar and the euro on dips, then sell them at a profit,'' said Ogawa, who added that she has made a 20 percent return on her 1 million yen trading account since December. ``It's better than stock trading, as you can rely on daily interest.''

A carry trade that bought the New Zealand dollar funded with yen would have returned 14 percent this year.

Yukiko Ikebe, a 59-year-old housewife in Tokyo, in April was indicted for evading about 139 million yen in income taxes while earning 407 million yen trading foreign-exchange, according to the Tokyo District Public Prosecutors Office.
``She must have earned more money than us,'' joked Yuji Saito, head of the foreign-exchange sales department at Societe Generale SA in Tokyo. ``I said to my colleagues, `let's find her and hire her!'''


I initiated a carry trade position before this market turmoil, as you can expect it has gotten slaughtered by the huge rally in Yen after recent volatility. But the great thing about my broker is losses are only realized when a position is closed, I'm still earning daily interest that is compounding & should the yen reach previous levels before the sell off, I would not realize any losses and perhaps even a gain! Interest rate differentials cause currency movements, as long as the spread offers opportunity greater then the volatility of the currency pair, the carry trade is still in play. I have had some recent conversations with a co-worker regarding the use of options to hedge currency risk which may have some potential.

I got great ideas, I just need some capital to implement!!!