Booms, Busts, and Recoveries Message Board

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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: Mark Adams who wrote (41173)	11/10/2003 3:41:11 AM
From: macavity	Read Replies (1) of 74559

Arbitrage and other fairy stories. There is The Carry Trade - borrowing in one currency to buy assets in another, and there is arbitrage. If you hedge everything your return is the risk-free rate - equivalent to you making a simple deposit/loan. The Carry Trade is an acceptance of a yield differential for price risk (in this case fx). Typical FX volatilities are roughly 7-10% p.a. Therefore the FX risk far outstrips the yield differential. The Carry trade only works if you are right about the FX direction. Remember USDJPY going to 79 level - well that was the unwinding of the Yen Carry Trade. I am always amazed at the leverage community that does this. Arbitrage, my eye! This was in 94 - I think. For USD vs Fiat - $USD - I am sure there is enough dollar-bearishness at the mo to give USD some support in the coming months. Watch the 1 year stoch - it is hinting that there may well be support for $USD. The ECB will defend EURJPY=1.20 and the MOF will defend USDJPY=105.00 for a while here. -macavity

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