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Tags: carry | trades

Carry Trades Are Dead for 2009

By    |   Wednesday, 08 October 2008 12:20 PM EDT

The market is shifting gears, and most don't see the wind of the market changing directions. Let me tell you, when this happens, it cleans out a lot of people's trading accounts.

Anytime you have trends in place for many years back-to-back, people don't believe it when you tell them that the direction is changing. Why? Because they think that history has reinforced their view. This is why the market eats their lunch during these pivotal times.

For instance, remember when the Nasdaq went from 2,000, 3,000, 4,000 and even 5,000 over a long period of time? After it topped just above 5,000 and pulled back sharply, what did people do? They bought up more "high tech" shares because, after all, "this was just a pull back" right? Wrong!

It was a trend change, which meant that it was now a bear market rally, and they had no clue because it felt like all of the others moves before. The Nasdaq went from over 5,000 down to 1,000 or so over the next several years.

Yet, at the time you couldn't tell hardly anyone that it was the top and that a new downtrend had formed. In fact, the downtrend had been in place for almost a year before you could get anyone to believe it. By that time, most of their net worth had been erased. What a shame!

Well, the same thing is happening right now in the currency market, and there are few who realize it this time either.

Let me give you a couple of examples.

For months now, the carry trade has been dead in the water, yet everyone is just waiting for it to come roaring back. And don't get me wrong, it will have huge bear market rallies. But it's still in a long term downtrend for the next year.

For instance, here's a pair that is representative of most any carry trade pair out there. It's the king of the carry trades, which is the pound vs. the yen (GBP/JPY). While there are a few currency pairs that pay higher interest, those don't show up on every trading station out there. Yet GBP/JPY shows up on any trading station in existence.

Traders love this pair because it earns about $22 a day in interest, seven days a week (per standard lot). And that's a great thing as long as the pair is trading flat or upward trending. However, what does it matter if you earn $22 a day if you lose $200 to $300 a day in lost appreciation on the pair?

You can look to the monthly, 10-year chart as an example of this on your trading station. These carry trades have been in vogue for about seven years back-to-back. However, a pivotal shift took place about eight to nine months ago in these carry trades, and no one seems to have noticed yet!

So what does this tell us? Many traders will once again get long these carry trades on dips, not knowing that lower lows are coming shortly right behind them!

The carry traders are going to have a losing year in 2009. That's a ton of the money out there floating around in the forex market.

This tells me that the yen will flourish against most high-yielding currencies in 2009 as these major countries cut their interest rates. So there's a technical break down on the charts, but also an underlying fundamental issue that ensures that the new downtrend stays intact. Slumping economies encourage lower interest rates, which encourages a lower currency, which means these carry trades are heading south.

But here's what else is going to floor traders this next year and even in the months to come. At the same time these carry trades are breaking down (look at most any of them and their chart is about the same, EUR/JPY, EUR/CHF, GBP/CHF, NZD/JPY, etc.), another trade is emerging that is going to catch people off guard.

Many will not notice that the "majors" are breaking down as well, in the favor of the dollar. That's right! The greenback!

You can look to the 10-year chart of the U.S. dollar index when you get a chance, and it will illustrate this point.

This will be a hard pill for many currency traders to swallow. But even the buck has "up" years. While they are few and far between, 2009 will be one of those years. In fact, it is starting even now. Yet most won't realize it until it's too late and it has eaten up most or all of their account!

Any way you look at the 10-year chart, you see that a monumental thing happened. The U.S. dollar index closed the month above its downtrend line for the first time in six years. That's huge.

You see, since traders are accustomed to everything going up against the buck if you hold on long enough, they'll hold on too long and lose all they have because this is one trend that will outlast their account balance and then some. It will be in force for so many months that it will wipe them all out before they know what has hit them.

So the carry trades are dead (except for USD/JPY and maybe USD/CHF), and the majors against the buck are dead for the rest of 2008 and all of 2009.

That means the only investors who will survive are those who realize that the dollar and the yen are two of the best places to be during that time. I know it sounds crazy, but it's going to be the place to be and the place to profit in the coming year (and even now).

The carry trade by and large is too expensive to hold long term short positions on because it costs too much in daily negative rollover interest charged against you to come out ahead for the most part.

So your best bet to earn interest while being right on the trade is to own USD/JPY and USD/CHF.

Your next best places to go after that are to short EUR/USD, GBP/USD, and NZD/USD over the next year. Yes, you will pay some negative rollover, but not nearly as if you shorted a typical carry trade. And you'll more than make up for that interest by the appreciation in the trade as these pairs head south and your account balance heads north.

This is a huge shift in thinking for most traders out there, and it's one that most won't dare make.

It's also why they will lose their shirts in 2009. However, those who are continually willing to see things differently and re-evaluate their positions periodically will realize this.

Believe me, this will be a small crowd that is willing to do this. However, you can be one of the ones in that elite crowd that is truly in the know.

So, go through and analyze all of the major multi-year trends out there. I think you will see that there is a pivotal shift that is taking place out there that most investors aren't aware of yet. Just realizing this early on is going to keep you ahead of the pack and in the game in 2009 when many fall by the wayside.

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The market is shifting gears, and most don't see the wind of the market changing directions. Let me tell you, when this happens, it cleans out a lot of people's trading accounts. Anytime you have trends in place for many years back-to-back, people don't believe it when you...
Wednesday, 08 October 2008 12:20 PM
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