Lesson 5: Trading the Carry Trade (A Long Term Strategy)

As you've probably guessed we’re going to work our trading ideas from the carry trade and safe haven plays. Let’s do a brief recap here so you don’t need to re-read all the lessons to date. The Carry Trade: Okay so a Central Bank spends it's time either trying to stimulate a flagging economy (lowering IR, lowering Reserve Requirements and buying Debt), or containing a booming economy (raising IR and Reserve Requirements). This makes our life very easy for spotting potential Carry Trades... If we hear that a central bank is flooding it's economy with money and lowering IR, we know it's a great time to borrow money from it cheaply. While if we hear that a central bank is struggling to contain an inflationary economy (raising IR / Reserve Requirements) we know it's a great time to deposit money with them, and that's just what we do! We're almost a reverse Robin Hood, we borrow from the poor, and deposit with the rich. Very rarely one of the 3 “mega economies” (US, EU, Asia) goes into recession (2 consecutive negative quarters of growth/GDP). Our objectives must change from one of capital growth to capital preservation, so we buy the safe haven currencies (US Dollar, Japanese Yen or the Swiss Franc) until the problem “mega economy” has returned to growth (positive GDP). Our strategy can be summed up as “Money always flows to the highest IR except in times of global fear, when it seeks safety”.