We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

Free Trading Guides
EUR/USD
Mixed
GBP/USD
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
USD/JPY
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Bearish
Oil - US Crude
Bullish
Bitcoin
Mixed
More View more
Real Time News
  • Greed has proven to be a hindrance more than assistance for traders. How does greed lead to #FOMOintrading? Find out from @RichardSnowFX here: https://t.co/aT8TZjlFqP https://t.co/XtDrpjR4yT
  • Crude Oil Prices May Give Back Gains as Brexit Optimism Wanes - https://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/commodities/2019/10/14/Crude-Oil-Prices-May-Give-Back-Gaons-as-Brexit-Optimism-Wanes.html?CHID=9&QPID=917708&utm_source=Twitter&utm_medium=Spivak&utm_campaign=twr #OOTT #crudeoil #Brexit
  • Have you joined @DailyFX @facebook group yet? Discuss your #forex strategies and brush up on your skills with us here: https://t.co/jtY1G7g8yx https://t.co/RlubZzBmyN
  • Why trade with Bollinger Bands®? Find out as a day trader, how you can use it to your advantage:https://t.co/dwODDDSsFi @WVenketas https://t.co/lzHvMaeOxU
  • (#ASEAN Fundamental Forecast) US Dollar Outlook on SGD, INR and IDR Amid Trade Talks, China GDP #USD $USDSGD $USDINR - https://www.dailyfx.com/forex/fundamental/article/special_report/2019/10/14/US-Dollar-Outlook-on-SGD-INR-and-IDR-Amid-Trade-Talks-China-GDP.html?CHID=9&QPID=917702 https://t.co/EKyMMEJa00
  • LIVE NOW: Join Currency Analyst @ZabelinDimitri as he previews the upcoming week’s main political themes and discusses their impact on the financial markets. Register here: https://www.dailyfx.com/webinars/146770987?utm_source=Twitter&utm_medium=DFXGeneric&utm_campaign=twr
  • China’s CNY Trade Balance (SEP) Actual: $39.65b Est: $34.75b Previous: $34.83b And China’s CNY Trade Balance CNY (SEP) Actual: 275.15b Est: 253.80b Previous: 239.60b
  • LIVE IN 30 MIN: Join Currency Analyst @ZabelinDimitri as he previews the upcoming week’s main political themes and discusses their impact on the financial markets. Register here: https://www.dailyfx.com/webinars/146770987?utm_source=Twitter&utm_medium=DFXGeneric&utm_campaign=twr
  • NZD/USD Technical Analysis: Bounce Hinted But Downtrend Intact - https://www.dailyfx.com/forex/technical/home/analysis/nzd-usd/2019/10/14/NZDUSD-Technical-Analysis-Bounce-Hinted-But-Downtrend-Intact.html?utm_source=Twitter&utm_medium=Spivak&utm_campaign=twr #NZDUSD #technicalanalysis
  • Join @ZabelinDimitri 's #webinar at 11:30 PM ET/3:30 AM GMT to find out how geopolitical risk will affect the markets in the week ahead. Register here: https://t.co/hsULxMNOtM https://t.co/bNyuTGf0xx
Meet the Exotic Currencies that are Reviving the Carry Trade

Meet the Exotic Currencies that are Reviving the Carry Trade

2012-10-17 03:00:00
Tyler Yell, Trading Instructor,
Share:

Last week, we touched on why you should consider exotic FX pairs in your trading plan. Today, we’re going to introduce a distinct fundamental aspect to trading exotic FX. Exotics are the main place where you still have the ability to earn interest like a bank does when they loan money so you can employ the Carry Trade strategy.

Meet the Exotic Currencies that are Reviving the Carry Trade

What is the Carry Trade and who is it best for?

The Carry Trade is a buy-and-hold strategy that is best for yield hunters and trend followers. It’s not as exciting as day trading at first. However, if the conditions are right, this can be an excellent addition to your FX trading plan. The carry trade is a powerful set up where a trader looks to gain not only on the profit or loss of the pair going in the direction of the trend but a strategy that allows you to collect interest payments. You can collect interest daily if you buy the higher yielding currency and sell the lower yielding currency. This presents a unique opportunity in FX trading that in the current low interest rate environment is best found in exotic pairs.

Picking the right market condition and pair is key to the successful Carry Trade.

The New Carry Trade Players:

Major currencies have slashed their overnight bank rates and rollover payout to take them out of Carry Trade considerationso they can spur economic growth through low interest borrowing. Here are some interest rates of exotic currencies that you can take advantage of by utilizing the carry trade.

Exotic Currency Interest Rate:

Hungarian Forint (HUF): 6.50%

South African Rand: 5%

Mexican Peso (MXN): 4.50%

Turkish Lyra (TRY): 5.75%

Russian Ruble (RUB): 8.25

Source: http://www.banksdaily.com/central-banks/

OK, how do we find out the payout of these currencies against lower yielding currencies?

Once you've found an attractive rollover, here are two things you need to look at to see if you should take advantage of this as a carry trader:

  1. Does the rollover pay out in the direction of the overall trend?
  2. Depending on how long I’m wanting to hold the trade, is this worth it to me?

Meet the Exotic Currencies that are Reviving the Carry Trade

The EURHUF has the highest rollover payout in the direction of the trend. Requirement one is met because the payout pays in the direction of the trend.

This is not an uncommon play because currency strength is often dictated by interest rates.

The payout on a Sell EURHUF 100k trade is $12.00 per day on the RollS. The Margin required from a large broker is $7,500 with an annual interest payout of roughly $4,380 or 4.4% on the entire 100k position and more on the margin required. To date we’re in a 4,620 pip down trend which would add $21,437 onto the trade had we held this trade throughout the year.

Requirement two asks if it is worth it for you to hold on to the trade given the rollover. Notice how the RollS or rollover on the sell trade is positive. This means when I sell the pair I earn the interest. Because my interest payment and trend are aligned in the same direction I want to be a seller on this pair.

This trade was hand-picked but the purpose of the article is to build the behavior in you of looking toward exotics for a carry trade opportunity.

We do not advise trading only for the rollover even though the payout on one side of the trade can be inviting. Pull up a longer term chart and make sure you’re not trading against the overall trend.

When dealing with exotics, the trends can go on for months and move sharply. If you are on the wrong side of a strong trend you can get stopped out quickly and the interest gained on the rollover payments can be diluted quickly by the loss on the trade.

Here is a chart of the USDMXN for 2012. Notice the two large trends, one up and the other down. You’ll see why it’s not worth holding onto the trade counter trend just to pick up the rollovers available:

Meet the Exotic Currencies that are Reviving the Carry Trade

To summarize, we only want to use the Carry Trade strategy if you’re willing to stay in the trade for the long term and if the currency pair’s trend is in the direction of the worthwhile payout.

Daily FX recommends a large moving average to identify the overall trend.

---Written by Tyler Yell, Trading Instructor

To be added to Tyler’s e-mail distribution list, please click here.

Want to learn how to better identify the trend? Save hours in figuring out the overall trend by taking our Moving Average Trading course.

Take this free 14 minute Moving Average course presented by DailyFX Education. In the course, you will learn how to filter worthwhile trends, identify support and resistance, and find which entries give you the highest probability trades.

Register HERE to start your FOREX learning now!

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

News & Analysis at your fingertips.