| Should the carry trade carry the can? |
This has been the question that many traders asked each other over the last few weeks. The Japanese Yen has risen strongly just as the stock market tumbles, causing many to question the role of the Yen in the recent stock market collapse writes Betonmarket's Michael Wright.
What is a carry trade? A carry trade is when a trader borrows from a currency where the interest rate is low, such as Japan and then converts it into a higher yielding currency such as USD, GBP or the CAD. The difference is called the carry. The trader is now able to invest those funds in either a treasury fund, or into something more risky and potentially higher yielding such as the stock market or hedge funds.
If investing in treasury bonds, the only area of exposure the trader faces is the exchange rate. If the Yen appreciates against the borrowed currency then the trader could face a loss on exchange when he unwinds the trade. However what if he invested in the stock market and the market took a dip? Well the trader now faces pressure from both sides and when both the exchange and the market goes against him, the trader would be forced out much faster, causing him to buy back the Japanese Yen and in turn push the Yen that much higher which causes others to be forced out. This slide could cause the affected markets to fall hard and fast within minutes. Last week, charts of the Yen/ USD & Yen/ GBP compared to the S&P 500 looked remarkably similar.
Recently week the GBP, USD, EURO, AUD & NZD all fell hard against the dollar. They recovered somewhat last week, but this recovery still has some way to go relative to the highs and crucially relative to the stock market. This leads to the idea that the Yen/USD exchange can be used to potentially profit when seeing the US markets slide. There has been a remarkable 'flight to safety' recently with yields on short term interest rates plunging with a speed seen very rarely.
The pervasive relative strength of the Yen could be taken as a leading indicator that the stock market falls aren't done. We still don't know who is exposed to what in the sub prime quagmire and even if the US do lift rates, it is hard to see the US indices rising past the years highs in a hurry.
With that in mind,  www.Betonmarket.com has the tools to allow the common trader to profit from this potential weakness. Using Betonmarkets you can use a 'no touch bet' which compensates you if a predetermined trigger isn't touched during the duration of the bet. This means you set a point that you think the stock market won't hit within a certain time frame and if it doesn't, you win. The advantage of this is that the stock markets can gyrate wildly up and down but you'll still win provided you 'no touch' level isn't hit.
One strategy would be to place this 'no touch' level 1000 points away from current level of the Dow Jones. Over 25 days this has a 10% return on investment.
Article Source: UnArchived Articles
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