CARRY TRADE, BOJ and the FED

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Someone asked me recently what is meant by “Carry Trade”. In the simplest terms possible, the carry trade is the favorable spread between one interest rate and another. In other words, banks borrow money at a cheaper percentage rate (say at 3%) than they lend it (say at 5%).

A perfect example of how an individual can take advantage of this “carry” would be to borrow funds in Japan at 0.5% (the current rate) and investing in a AAA rated 30YR bond in the US at 4.5%, effectively taking an almost risk-free profit of 4%.

 

On to other matters; as expected, the Bank of Japan (BOJ) left interest rates at 0.5% in a follow up move to maintain liquidity and help current credit conditions. Japanese exports have been slowing down compared to last year, reflecting the overall market conditions. The recent rally in the Yen, the drop in the US Dollar and the slowdown in the US economy, probably contributed to the BoJ’s decision. Today however, the Yen is down 108 points following the BOJ’s decision to leave interest rates unchanged with funds flowing back into the Euro.

In the US, the Fed has been very active in helping the economy, banks and consumers first by lowering rates by ½ % and today the Fed has accepted mortgage-backed collateral to lend $7 Billion to banks. Bank of America also showed its vote of confidence in the future of better-times-to-come by investing $2 Billion in Countrywide.

All this activity should contribute in restoring consumer confidence. After all, if homeowners cannot access their own gigantic ATM machine (their house) spending would come to a halt. Should the Fed get even more aggressive and drop rates another quarter point, refinancing – even under stricter lending rules – could take off again and boost consumer confidence and therefore spending which has been the backbone of this economy for the last few years.

 

I have no trade recommendations today, but I expect the US Dollar to give us a new opportunity to go long again in the very near future.

 

Good Trading,

 

Chad Geraigiri

Optimus Trading Group

1-800-771-6748

 

YOU SHOULD BE AWARE THAT THERE IS A RISK OF LOSS IN FUTURES TRADING.  PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. FUTURES TRADING IS NOT SUITABLE FOR ALL INVESTORS.