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Tonight's 3-D Midnight Special: The Decoupling From The Blue Lagoon
And some thought FX-Risk decoupling only occurred during the non-vampire hours. After tracking stocks tick for tick all day, the AUDJPY has developed some late night schizophrenic tendencies. So for any insomniac traders with a taste for virtually risk free arbitrage, here is your opportunity to take advantage of one of those ultra rare occasions where the ES is actually cheap to the AUDJPY - buy spoos, and sell carry, for a roughly 6 point indexed spread convergence. If discount window access is available, lever to infinity and retire or threaten systemic implosion if and when trade goes awry.
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It's so much fun! I've been watching this cross for a week at 3 am.
The gift that keeps on giving.
Cheap is relative. It is currently 20 s&p points above the last time the divergence was posted. (7/12 or 13 i think). It spiked up to 45 and has been on the way down since friday.
There is definate reversion to specific levels intraday it seems, but this also does move and not come back for a while.
Tyler,
the BB graph of the ratio of ES and AUDJPY is a lot more informative to look at vs the overlayed graphs.
Well, this explains a few things. It also means that you might want to buy a few Dec crude calls.
http://www.debka.com/article/8918/
Yeah, because DebkaFile is the MOST accurate source for Mid-East news! They've been predicting a Israel-led invasion on Iran for the past 14 years.
I'm not sure you are fully aware of who is "behind" Debka.
Ridicule Debka if you want but the Iranian was clearly a double-agent...its the only possible explanation. The implications of his repatriation are compelling.
76.30. wow. break channel. do it.
USDJPY more interesting.
Hows that for a failed carry?
Same as what was going on in summer of 07..you know..BEFORE the October massacre of equities.
Forced liquidation here we come. Unlike the past 3 market plunges which have been about every 10 years (87, 98-99, 08) this next one should {hopefully} be in this fall.
From the humble Novice to the Experts: How does one actually sell the AUDJPY carry?
forex account. Or you can do it through futures, but the ratios will be less precise.
Lost in translation, but it sounds, once again, like I need to know "it". Insomnia....Luv it....
So.......... exactly what level of trader understands and can carry this out? Its over my head but that isn't saying much. I like reading the economy stuff here at ZH but now I'm starting to feel like I'm missing out!
One that has either a forex account funded, or another account funded which can trade S&P E-mini futures (ES).
So, in the forex account you buy AUD/JPY while in the other account you short ES.
They usually move in lock step on the charts, but sometimes they move away from eachother, in which case you position yourself in the direction which brings them back together cuz they WILL get back together. Don't overleverage yourself though.
what would be the aud $ amount
per es mini contract @ 100 to 1 lev,.... thax
To add to that some future accounts allow you to trade both but the currency trades are full contracts, and on Think or Swim you can trade everything- options, forex, futures, and stocks.
You... you can understand it and carry this out!!!!
"virtually risk free arbitrage" means It's a very small risk in this trade because there is a very close correlation between the two indices (white and green lines). In simple terms this means that most of the time both lines in the graph are going to be together. The word arbitrage means that you are going to take advantage of the difference that is occurring between these two lines. If you know that there is a high correlation between these "lines" and then you see a gap like the one we have in the graph, you take advantage of this fact and bet that the two are going to come together... in order to come together the line at the top (green) that is the currency pair AUD/JPY probably is going to come down this means that you are going to short it and probably the white line that is the ES (E mini S&P 500) sooner or later is going to go up to meet with the green line, so you buy the S&P.
He uses the phrase "where the ES is actually cheap to the AUD/JPY" because as you can see the white line that is the S&P minis is lower than the green line that is the AUD/JPY that is on top.
Buy spoos... means buy the E-mini S&P 500 futures (aka spoos)
Sell carry... means short the AUD/JPY. The word carry is used because this currency pair is now being used as the currency carry trade "du jour". In simple terms carry is like saying... "the popular girl in school". If you want to understand more about the reason why AUD/JPY can be called "carry" then you can read this (short and easy to understand on how currency carry trade works): http://www.babypips.com/school/how_does_the_carry_trade_work.html
"for a roughly 6 point indexed spread convergence" this is the size of the gap between the two lines (check the white scale on the right side of the chart... the difference between 1068 - 1062.50 = 6.50)
"...If discount window access is available, lever to infinity and retire or threaten systemic implosion if and when trade goes awry." ... here he is just being sarcastic...
Thanks for the explanation. I understand this much better now. The next question I'd have is to run through a sample trade (quantities) and see how the money works.
I suppose when there is this divergence you can also just trade one side if you're squeamish, but you miss the return that is "likely" on the other side.
What will kill this correlation? An ascending yen, such that is is no longer the carry trade darling?
The idea behind a currency carry trade is that an investor looks to lend at the interest rate in the high yielding currency (in this case AUD) and borrow at the low yielding rate (in this case JPY). Before the AUD/JPY the "carry" was EUD/JPY if you check both pairs they have in JPY... this is the "slutty" component of each pair. If the difference in yield between the currencies in the pair is reduce the pair becomes less "carry". The fact that JPY is present in both is not a coincidence (read about Japan's economy in last decade).
Yes. If the yen appreciates because for example Japan raises interest rates (unimaginable!) and nothing happens with the AUD yield, the pair becomes less "carry"...In simple terms it would be like.... let me see.... let's say that AUS/JPY is the leading cheerleader in the squad... but one day the leading cheerleader start developing cellulite.... you get the point!
Now, why if this would happen the correlation between the "carry" (our cheerleader AUD/JPY) and the S&P will be altered....
Most of the excess liquidity generated with the "carry" is used to fuel other high yielding assets in this case.... S&P...
(here is a complete example and technical explanation http://www.dailyfx.com/story/bio2/Does_Carry_Drive_the_Dow_1178709252112.html )
.... back to our cheerleader example.... the squad leading cheerleader(AUD/JPY) has a friend (S&P) that is also a "hot girl" they are friends but not real friends just friends because both are popular girls in the school.... as soon as our leading cheerleader develops cellulite they start having problems in their relationship because the chearleader's friend status is going to suffer... suddenly they don't have a relationship anymore...
You and the Mrs Wantabes/japan banks and (YEN selling) by the BoJ are all thinking the same.
What we are waiting for is a massive risk averse sell and see the longs get slaughtered and carry trade decimated
Run your chart against the AUD/USD...almost identical.
*math tests?
"If discount window access is available, lever to infinity and retire or threaten systemic implosion if and when trade goes awry."
The comedic genius of ZH never rests.
The problem some of you will find with this trade is if the spread diverges further, which it tends to do if it dfoesn't close overnight and the stock market has some weird happenings or news the next morning. In that case you must worry about margin or you will be closed out.
Also, AUDJPY and the stock market have very changing ATRs. With the odl EJ trade on this it was an easy 1:1 ratio. AUDJPy has a mind of its own sometimes. Last week, the 10pt spread closed only to have the trade still in the negative (as I warned about in previous posts where the ratio should be 3:2).
XAUUSD / XAUEUR / XAUAUD bearish warnings issued since July 1 continue . . .
http://stockmarket618.wordpress.com/about
SWEEET! Finally some helpful people taking some time out to explain how this trade actually works. A lot of us are amateurs just looking to learn. We're smart enough to come here for advice rather than listen to cnbc but sometimes we just need a little extra help understanding your fancy trades.
I finally get it! Jesus, only took a month!
Thanks to those who helps explain it to the rest of of amateurs.