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The Aussie/Euro Cross is the Carry Trade in its Purest Form
If you want to participate in the global carry trade in its purest form, take a look at the Australian dollar/Euro cross. This trade capitalizes on the harsh reality that there couldn’t be two more different economies in the world today.
The Australian economy is virtually drowning in riches. Japanese and Chinese private and state owned enterprises are lining up to buy iron ore, gold, oil, aluminum, meat, copper, wool, wheat and a cornucopia of other bulk commodities. Last year, the home of the kangaroo and the wallabie shipped a staggering AUS$150 billion of coal. Poke a hole in the Northwest Shelf and out spews enough natural gas to light the Middle Kingdom for a year. That explains why the Reserve Bank of Australia was the first and the fastest to raise interest rates coming out of the financial crisis. They’re actually worried about inflation down under.
Conditions couldn’t be more different in Europe. The dire straits of the EC’s weakest members are certain to prolong the European Central Bank’s zero interest rate regime. The gasoline on this bonfire is debt levels that make America look like a paragon of fiscal integrity. Some analysts are predicting that the Euro itself might not even survive the crisis.
How long can a sober, conservative German grandfather be expected to indulge the disgraceful habits of its party animal, thrill seeking, drug addicted grandchildren? I fear not long. That will give the market the juice to take the greenback through to the $1.30’s initially, and eventually to the $1.20’s.
Your long goes up and your short drop like a stone, and everything works like it is supposed to. It is a trade that long in the tooth macro players, like George Soros and Paul Tudor Jones, glory in.
A first cousin of this play is the the now notorious “PIIGS” trade. To the uninitiated, this is where you go long the debt of German government agencies, a country that has passed a constitutional amendment to balance the budget by 2016. (Hellooooooo! Is anyone in Washington listening?). You then short in equal value amounts the debt of Portugal, Ireland, Italy, Greece, and Spain.
This trade delivered a home run in a matter of weeks for the big hedge funds that strapped this on at last year, and could have more to go. That was the message the markets screamed at us last week, when yields on the sovereign debt issued by the home of Plato and Socrates rocketed by a gut-wrenching 400 basis points against German bunds. Beware of Greeks bearing bonds.
The Aussie/Euro cross touched 62.50 last week. For a start, the cross gives you a nice yield pickup of an annualized 3.64%. Leverage up ten times, and that balloons to 36.4%. That’s what you make if this cross goes nowhere. If more investors pile into this trade after you, or if Australia keeps aggressively pushing up interest rates and the yield spread widens, then you can count on a substantial capital gain on top of this. Now you know why so many traders make a living doing this.
The easiest way to put this cross on is through the futures market, by balancing long Australian dollar and short Euro June contracts in equal value. If you are a giant hedge fund or a commercial bank, you can achieve the same through the interbank FX market. Retail investors can even position themselves through ETF’s and options.
Of course, this trade has been running for some time now, and there are hundreds of billions of dollars ahead of you from the big hedge funds. So there is a risk you could get shaken out, especially if you use leverage. But if you want to know how the big boys are coining it, this is the way.
For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily. You can also download past interviews with industry heavyweights on Hedge Fund Radio.
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Always brightest before sunset.
Big4 like the Kiwi/Aussie Cross...
http://www.jubileeprosperity.com/
EURAUD has more downside, much more, if only because the germans and french are happy for once to see their proud EUR weaken, returning the kick to Ben's back. But all Asian currencies would have to take the "slack" soon, no one really believes Geithner when he says treasuries issuance would slow. The carry trade won't end here, it just goes around until Asia cracks, then move on, hedge funds have nine lives, they need some simple way to make money, they are so smart to find new ways to delpoy their 3 trillions (unleverage).
As for CAD or AUD, which do you prefer: canada's exposure is first to the US, second to china; australia's is first to china, second to greater china (ie Japan/Korea/SE Asia). and canada has a real estate bubble as big as that of the UK or Australia. imho, both are goners, as are EUR and GBP. When the euro hit 1.2, the AUDUSD would be well below 0.7 and USDCAD well above 1.2. Still think CAD is better bet than AUD, then go long CADAUD.
Wanna know what's so sneaky about this? Everyone knows that Soros made his fortune in forex, and everyone sees the pressure in forexland, so everyone tries to pile into these forex trades and lets their money be stolen from them by...people with connections in forexland and the CBs ability to push currencies and media stories about them.
Suckers.
Bingo! You sir, are 100% correct.
One cannot take the CDN gov't at their word. What they say does not pass the smell test... IMO
Exactly.. no one would believe it either..
Beware of Greeks bearing bonds.
LOL
+2 for the joke.
-1 for laughing at your own joke.
-1 for posting Anon
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0 (when are you guyses going to start taking credit for you work?)
+1
The deeper the mess goes, the darker the rabbit hole. Either way it goes, all the currencies are insuring the "pan for gold" theory.
You mean. The oh. Look you're broke. Hey we heard you have alot of gold in a vault and we'd be willing to take that off your hands though it's a barberous relic and not worth much. Greece has GOLD.
I wonder if they did the same gold for paper scam on dubai? Ok you can't pay us back our paper bonds. We'll just take all the tungsten, I mean gold, we have been safekeeping for you in london.
CAD has significant export lead exposure to China as well these crosses are one way to be short the EC, not long the commodity CCY, IMHO....ifn CHina allows the Yuan to move high though, definately agree EC going lower vs USD...
yeah, I think Canada is a mini Oz...things are nuts up in Alberta, due to commodities, but there is also a housign bubble, although, fiscally Canada appears a bit better in order than Aus...Steven Keen says Aus debt ratios bad as many other bubble places were...
I think commodities run up have masked the last of the fall more so than equities run up...as commodities produce reall jobs, equities just produce wealth that may not effect employment...other than special cases of metals suddenly in demand, commodities in general have to fall, China can't keep stockpiling forever, and if they tick down, population that has been speculating in copper etc will sell to get out from under leverage..
GS style.... "now's the time to get in to this trade"
[exit door at rear]
http://shadowcapitalism.com/2010/01/14/possible-reversal-imminent-in-imp...
Better cross to look at is the CAD/Euro cross. The Aussie economy is more heavily leveraged to the Chinese economy and their housing market is in a bubble.
No housing bubble in Canada?
http://online.wsj.com/article/SB1000142405274870380890457502510073001766...
Yeah but it will take longer to implode here. Unlike the Reserve Bank of Australia, the Bank of Canada will not hike rates before the Fed moves.
Good point Leo, although Canada has its problems (hitched to the US economy moreso than Australia to China).
Mad Hedge Fund Trader also forgets to account for the cost of the leverage in the levered play, doesn't seem that simple to just make 36% on a trade.
He also forgets to checks his "facts", proof his piece or check how his last few calls turned out. How can anyone not love 1 line cursory answers that explain things like AUD capital flows / interest rates or why Martin / gov have acted the way they have, in less than 50 words. This piece looks much longer than the usual 500 word gems o gist that we're used to now. Thanks for the chuckles, too Mad to spell-check or come up with an original thought.
Australia has a big housing bubble, AND it is over dependeant on the CHinese bubble. 2 bubbles and you make a stupid point that the AUD is a strong currency!!