Why I’m Singing “Waltzing Mathilda” in the Shower

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If you want to participate in the global carry trade in its purest form, take a look at the Australian dollar. The central bank has been the first and fastest to raise interest rates because of rocketing commodity prices and booming business with China.

They call Australia “The Lucky Country” for a reason. I have that perfect combination of huge resource and energy exports, a strong economy, rising interest rates, a small population to support, and great looking women.

 For a start, you get a nice yield pickup of an annualized 4.75% by strapping on this trade, which is the interest paid on overnight Australian dollar deposits. Leverage up five times as many forex traders do, and that balloons to 23.75%. That’s what you make on the spread if this currency goes nowhere. If more investors pile into this trade after you, or if the yield spread widens, then you can count on a substantial capital gain on top of this. Now you know how so many traders earn their bread and butter. If you want to know how the big boys are coining it, this is the way.

There is only one thing wrong with this trade. It has been running for two years now appreciating an eye popping 75% against Uncle Buck, from 58 cents all the way up to 102.50. That gives it something of a “last year’s trade” flavor. 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 if you get involved here, especially if you use leverage. So I would only start to scale in after a 10%-20% pull back, which we may see sometime in 2011, especially if my strong US dollar scenario pans out. So for now, just keep a pin up of the Ausie on your locker room wall.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.