Today's commentary is by Jack Crooks, editor of The Money Trader and World Currency Options.
Greetings Currency Traders! The words "carry trade" evoke all kinds of thoughts and emotions in today's supercharged financial markets. And for good reason. The carry trade has been the driver of some explosive trends in almost every asset market you can think of from stocks to real estate.
This year, the reversal of "carry trades," (yes there's more than one carry trade!), will create some incredible long-term trading opportunities in the months to come.
Let's examine this thing they call a "carry trade" and look at why it's been such a powerful driver of asset markets in the past. Also, let's look at how the carry trade will continue to drive assets going forward - but for an entirely different reason...
It's Not Rocket Science - It's Just the Spread
Though commentators can make this sound complicated, it's not. Think of it as a simple three-step process and I think you will have the mechanics of a carry trade nailed.
Three-step process that defines a carry trade:
Borrow the low cost currency i.e. low interest rate currency
Covert the borrowed currency into currency of your choice
Reinvest into:
Deposits of other high yielding currencies
Stocks
Bonds
Commodities
Real Estate
Derivatives
..."
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