AUDJPY - opportunity plus!

[money tree]

INFLATION:

The first inflationary factor is wage increases. If wages rise, inflation is likely to be right behind. The second is producer prices. This is the wholesale price. If these prices rise, then consumer inflation is most likely right behind.
Finally, if consumer price rises are above gross domestic product, you will feel inflation. If we see two signs, such as wages and producer prices spiking, then chances of inflation are even stronger. If all three are sharply up, the suggestion is that inflation is already there and strong. (pity the RBA has no clue)

Here is where the major economies stand now.

Wages:

Australia 6.1%
Britain 3.6%
Canada 2.8%
Denmark 2.8%
Europe 2.2%
Japan -0.3%
Switzerland 0.9%
US 3.1%

This first factor suggest that the seeds of inflation are planted in Australia. The numbers also suggest that inflation is likely to be less strong in Europe as in the US.

Wholesale Price Increases:
Australia 6.2%
Britain 2.3%
Canada 2.9%
Denmark 3.9%
Europe 4.2%
Japan 1.9%
Switzerland 0.8%
US 4.4%

Once again we can see a strong inflationary trend in Australia. This means a chance for a higher Australian dollar interest rate.

Retail Price Increases:
Australia 3.0%
Britain 2.1%
Canada 2.0%
Denmark 2.2%
Europe 2.2%
Japan -0.8%
Switzerland 1.0%
US 3.5%

The numbers above show the Australian dollar having stronger inflationary patterns than the other major currencies and Japan having the least.

This suggests that interest rates are very likely to rise here, and unlikely to rise in Japan. There is an opportunity here. By going long AUDJPY, that is, borrowing yen @ near zero interest, and depositing the funds in Australia for around 5.5%, a profit can be made.

Some forex brokers allow 100x or 200x leverage. This means if you take $1,000, it will be margined up to $100,000 (for this example). Now we 'invest' in AUDJPY. We borrow 86.5 x 100,000 = 86.5m yen @ 0.1%. This costs $100 p.a. We deposit the funds in Australia (this is actually redundant) and receive 5.3% p.a. This gives us interest of $5,300 p.a. Also, we are paid interest on the $1,000 margin giving an extra $53 p.a. So overall:

lending cost - $100
margin interest - $53
deposit interest - $5,300
net total - $5,247 p.a

on our $1,000 outlay, this is a return of 525% p.a.

There is of course currency risk. If AUDJPY falls, we can lose money. Currently AUDJPY is 86.5. If it fell 2% to 84.77, we are down $2,000. If this happened after 6 months, we would have collected $2,624 in interest, so would still be $624 ahead.

But.....currencies with positive carry tend to trend upwards. History shows that most likely, AUDJPY will rise over time. A 20% rise in the currency would add $40,000 profit on top of the interest.

Another risk is that rates do not move as predicted. If rates stay put, thats a good thing. If Aussie rates rise and Japans dont, thats a VERY good thing. If Japans rates and Aussies rates increase the same amount, thats a bad thing. The only bad thing, is if Japan rates rise more than Aussie rates. This is possible, but not likely. It is also possible that 2 yrs down the track rates have changed and AUDJPY has fallen, but interest collected matches the amount lost.

So you can see why this opportunity has a positive expectancy.

I will be setting up such a trade shortly. My broker Oanda has a 50x margin, and spreads on interest rates are good but not the best. I want a broker with the best spreads and highest margin. ACM offers another 0.2% in interest and 100x margin.

I plan to buy 200,000 AUDJPY, margin costing $2k. I will deposit $12k to cover a possible 2% fall. After a few months, I will begin pyramiding the position.

This will pay me $10,476 p.a.....excl any capital gains. Also, it kind of insulates me against my mortgage.

[Dan_]

Tree,

Interesting to read. Is this method one you use often?

[money tree]

carry trades are not my primary motivation. I will often consider the interest before entering a trade tho. It gets very expensive to short AUDJPY (another reason it is less likely to fall).

A year ago I found an arbitrage. I was long 300k AUDJPY with oanda, and getting $75 a day interest. I hedged the position by shorting 300k AUDJPY with ACM (who were morons with a $1 per 100k interest policy).

I was left with $72 a day risk free. After 3 months they caught on and I closed both positions. made about 6.5k :D

It is difficult to time the market with this sort of trade, if using a large amount of leverage. I have often thought about taking $10k and using 10x margin. That would be fairly safe (allows for a 10% fall) and still pays around 60% p.a

[mit]

Interesting. Looking at the chart though there was a 6% drop back in December, so you may need some extra cash handy to top up.

People are talking about the Japanese economy taking off and the Australian economy having reached a top. Would this effect the exchange rate? Would people start moving investment from Australia to Japan? Not criticizing just looking at all the risks.

MIT

[money tree]

it went from 86 to 91, then fell back to 85......so long term holders would only have felt a -1 at worst.

one rule I would suggest is that if you get a years worth of interest in the form of a cap gain after 3 months.......EXIT.

In this case if you had bought @ 86, a 5% gain would give you 90.3. There you would exit and look for an entry sometime in the next 9 months.

[Smurf1976]

I want a broker with the best spreads and highest margin.
Agreed with your observations about inflation rising. The evidence is starting to pop up all over the place. I trust my eyes more than any official statistics.

Interesting that you didn't mention the money supply in your discussion of inflation though since that's at the very core of the issue. Print more $ and they're worth less, the effects of which are commonly known as "inflation".

As for your trading, I seriously wish you good luck but I think 100 times leverage is way too high and asking for a wipe out. Personally I trade forex with 3.3 times margin as a nice balance between profit and potential loss of capital. That figure was derived from proper testing of a strategy over time.

[Knobby22]

If inflation is increasing then interest rates will need to rise to stop the dollar falling.

There is a danger that the reserve bank may like to see the dollar fall to help our balance of payments. They may be able to do this by delaying the interest rate rise, causing a fall in the dollar. They could then raise the interest rate reducing domestic demand and cause a fall in the stock market. Foreign investors may withdraw their money from resource shares further exacerbating the dollars fall. Then you would get burnt.

Just an alternate scenario.

[money tree]

rates have been on hold here and in Japan for quite a while. Changes to the money supply are a counter-measure to inflation. The money supply (aka rate changes) is not a cause or symptom of inflation. Im not sure what you mean when you say I didnt mention the money supply.....I mentioned interest rates many times.....

"print more $$$ and theyre worth less"

this isnt the U.S. We dont issue more government bonds (aka 'printing' money) as part of monetary policy.

as for 'trading' with 100x leverage I dont do it. This is investing. Its not 100x anyway....its $2k required and $10k more for margin calls......thats 200/12 = 16.67x

knobby

the deficit is a concern but the RBA is more concerned with inflation. I very much doubt delaying a rate rise would cause the dollar to fall. Even less likely is a course of action resulting in a deliberate dollar fall.

[Smurf1976]

"print more $$$ and theyre worth less"

this isnt the U.S. We dont issue more government bonds (aka 'printing' money) as part of monetary policy.

as for 'trading' with 100x leverage I dont do it. This is investing. Its not 100x anyway....its $2k required and $10k more for margin calls......thats 200/12 = 16.67x

There's more ways of increasing the money supply than issuing government bonds. Whilst it fluctuates, the trend has very much been up in recent years.

If you're not trading with 100x leverage then why the need for a broker with the highest leverage? Why is 50x not sufficient if you're only going to use 16.67x ?

You could well be right, that's why I'm asking questions, but I don't follow your thinking. :confused:

[money tree]

"There's more ways of increasing the money supply than issuing government bonds."

such as? (and dont say rate cuts)

reason for highest leverage is margin calls.

with 50x, $1,000 gets you only $50,000. You need $2,000 to get $100k. if the CCY drops 1%, you need an extra $1,000. Thats $3k total.

with 100x, $1,000 gets you $100,000. if the CCY drops 1%, you need an extra $1,000. Thats $2k total.

with 200x, $500 gets you $100,000. if the CCY drops 1%, you need an extra $1,000. Thats $1,500 total.

so its really only the starting capital required. To pyramid the position a higher margin means you can go bigger quicker.

[money tree]

bought my first small chunk.

50,000 @ 86.32

pays around $2,500 p.a or $48 a week.

not concerned if it falls, means the other 150k is cheaper

[Smurf1976]

"There's more ways of increasing the money supply than issuing government bonds."

such as? (and dont say rate cuts)

In 1996 the RBA's domestic portfolio consisted entirely of Commonwealth Government Securities (CGS). Over time the RBA has broadened the range of instruments it deals with. Most recently it has added bank bills and CD's. This, however, has not been sufficient and the RBA has consequently augmented its operations with the use of foreign exchange swaps.

http://www.rba.gov.au/DomesticMarketOperations/open_market_operations.html provides an explanation of the situation.

You can also keep an eye on the RBA's current assets and liabilities here http://www.rba.gov.au/Statistics/statem_liabilities_assets.html

I'm no expert in RBA operations I will readily admit. But the bottom line is that the money supply has indeed increased over time. See this link and note the table 26.35. The money supply is increasing more rapidly than the quantity of goods and services in the economy. http://www.abs.gov.au/ausstats/abs@.nsf/0/b87f23487c764a62ca256f7200832f26?OpenDocument

[macca]

Hi guys,

My new year res is to have a look at forex, Smurf can you tell me which company you use or have used in the past.

MT talks of Oanda, I know of them, I have found GFT, IB and Easy forex here in Oz, any suggestions ?

Macca

[mit]

I got a small position as I liked it technically. I found a bit of a rip off in the payments though. I don't know if it is just %$!@# CMC or not. For the rollover it shows:

sell at 86.2350
buy at 86.2248

Which is $11.83 for every $100k positition. If you multiply this by 365 you get a return of around 4.32%. All well and good. However, I found that CMC don't pay you over the weekends so your return is only actually 3.08%.

MIT

[Smurf1976]

Hi guys,

My new year res is to have a look at forex, Smurf can you tell me which company you use or have used in the past.

MT talks of Oanda, I know of them, I have found GFT, IB and Easy forex here in Oz, any suggestions ?

Macca
They aren't the most "upmarket" broker around but I found Easy Forex to have a workable platform (as long as your computer is reasonably modern as it's rather processor intensive) so I'm using them. All OK so far and their online charts are good enough for my trading system.

I only have dialup internet but it all seems to work fast enough for me.

I won't be changing broker unless there's a compelling reason to do so.

[RodC]

Smurf,

Do Easy Forex pay/charge interest on positions which are open overnight?

I looked on their website, but could only find mention of a "renewal fee" which is charged on day trades held overnight.

I gather if they don't pay interest, then Tree's strategy wouldn't work.

Rod.

[money tree]

hope we are all long & lovin it

87.27 +95

interest is equal to roughly one per per day. Therefore, your breakeven decreases by one pip a day. Been long 6 days....plus 95 cap gain = 101......thats 101 days interest :D

[Smurf1976]

Smurf,

Do Easy Forex pay/charge interest on positions which are open overnight?

I looked on their website, but could only find mention of a "renewal fee" which is charged on day trades held overnight.

I gather if they don't pay interest, then Tree's strategy wouldn't work.

Rod.
They neither pay nor charge interest so they wouldn't be a suitable broker to use with Tree's strategy. Should have pointed that out... :)

For my particular strategy the lack of interest, especially not having to pay any, works well but not for everyone. That's simply because my strategy is based on price movement only and paying interest on some positions (eg short AUD/JPY) would have made the system far more complex so I chose a broker which didn't pay or charge interest.

Not sure which brokers do what with interest really. My priority was to design, test and implement a profitable system which works with the fee structure of a broker. I do intend checking out the other brokers more thoroughly and investigating to see if the system could be modified and applied with their structure more profitably but that will take quite some time to research properly given the need to avoid those brokers which do "funny" things which don't boost profits. One thing I'm looking at is running with two brokers at the same time to reduce such risks since they are not insignificant.

[GreatPig]

I just want it to be high so I can get a good rate when I go there in a couple of months :)

Last time I went back in '93, I only got Y68 to the dollar :(

Cheers,
GP

[money tree]

89.32 +300

now when did the pied piper give you anything this good?

thats 5 from 5 for me. a perfect record.

and amazingly, there are people here dumb enough to suggest I add nothing of value.

well, how you like them apples?

[RodC]

Yep,

Good pick tree,

I'm still getting my head around this forex stuff, looks interesting.

Rod.

[bullmarket]

Hi money tree

Well done if you actually made a profit on your suggestions....I have no way of verifying if you really did or didn't and/or to what extent....but then it's also of no interest to me whatsoever.

I see posters blatantly trying to big note themselves behind anonymous nic's in forums like this as nothing more than attempts to create illusions of success and credibility to help achieve whatever hidden agenda might be driving them.

Imo, blatant attempts to big note oneself leaves one wide open to having their posts laughed at by much more successful and wealthy investors/traders/business people or whatever who have taken advantage of much better opportunities than you suggested elsewhere.

Good luck in your endeavours and I'll continue to watch your posts with amusement :)

bullmarket :)

[money tree]

I dont really give a stuff what you think. I doubt anyone else does either. I didnt go to all of the effort of highlighting this opportunity to "big note" myself. I did it so that others could make money from it. Anyone with half a brain could see that.

Tell you what......you come up with the guts to make some calls, earn a perfect record and THEN maybe you MIGHT be in a position to pass judgement. Until then, shut ya friggin trap cos nobody gives a damn about your "your not as good as me cos I cant verify it" crap.

There is just no pleasing people like you. You think you can make yourself look better by making other people look bad. Even a kid can see through that. If you are insecure, perhaps this is not an appropriate means of dealing with your issues.

Oh and Im not anonymous, in fact I am the only person here where everyone knows my real name.

What is your goal here? To harrass and belittle people like me who highlight opportunities? Do you think people looking for these opportunities appreciate your actions? Are you jealous? What is your agenda?

Lets get one thing straight. These calls I made were done in real time. They were verifiable then, and they are still so now. I even posted my entry prices. So if you dont like it, dont read it. And especially, dont give your 2c cos nobody wants it. Accusing people of lying just makes you looks childish, jealous and insecure.

[bullmarket]

Hi money tree :)

I just call things as I see them and I gave my reasons why in my earlier post.

I will continue to post what I like with no consideration for what you think or say as I and everyone else is 100% entitled to do. :) As I said in other other threads, there are much more important things going on this world to be concerned about than your dribbling replies when someone doubts any claims you make.

I simply said I don't know if you actually made any profits (since there is no verifiable info to prove it) and if you did then there is no way of verifying how much profit you might have made. And all this imo leaves you wide open to being laughed at, when you claim alleged perfect records, by those who are much more successful and wealthy who took advantage of better opportunities elsewhere than what you suggested.

It's as simple as that and I can't be any fairer than that.

Feel free to continue with your childish replies to anyone that doubts any claims but as I also said in other posts they just make you look immature and foolish and I'm not going to argue with you like tech/a did. If you can't handle being doubted then the easiest thing to do would be to not make posts that are unverifiable. I will continue to question anything I feel is suspicious as I am also 100% entitled to do.

Good luck in your endeavours and I hope you let that bee out from under your bonnet one day ;)

cheers

bullmarket :)

[Smurf1976]

I disagree with the basis on which Money Tree made the call but the fact is that it has been profitable SO FAR. Can't argue with the results SO FAR but I would like to know precisely what would make Tree exit the position BEFORE such an event happens.

The point of this post is to highlight that there are different approaches to trading forex and that various methods can be profitable. I am not interested in entering any debate about Tree's integrity etc.

Using a totally different approach (it's a probability based system) my system is currently long both AUD/JPY and NZD/JPY. However only NZD/JPY is actually being traded with real money due to AUD/JPY having been closed early due to the unforeseen problems detailed on the forex thread on this fourm.

Entry NZD/JPY 79.49 25/01/06 now 81.57
Entry AUD/JPY 85.56 27/12/05 now 89.12 (closed at 86.39 due to abovementioned technical issues which are unlikely to recur).

Exits. The exit method for these trades is by means of a stop loss order. The stop for AUD/JPY is presently 88.52. The stop for NZD/JPY is presently set very loose at 79.58 and will be tightened significantly when an indicator tells me to do so. The level of risk taken on NZD/JPY trades is the highest of all pairs that I trade. EUR/USD is the lowest in terms of risk taken per trade.

FOR INFORMATION ONLY. I am not a licensed financial advisor etc. Forex trading carries significant risk of loss.

Mine is a totally different approach to Tree's but both have been profitable in this case SO FAR. But only COMPLETED trades count as far as I'm concerned so the jury is still out.

If you're trading forex or considering doing so then experiment with different methods to find something which suits you. :2twocents

[money tree]

as predicted AUD rates have gone up vs JPY.

AUDJPY has gone up 100 pips = capital gain
interest differential is now higher = 5.55%
interest collected since trade signaled = (11 weeks) 58.3%
also deposit interest collected

that $1000 is now $2000

:D

[tech/a]

Well done Tree.
Great call completely transparent.
How people trade it is entirely up to the individual.

[mit]

What was the greatest dollar drawdown over the period? It has been down to 82 (400 points?) since you bought it.

MIT

[mit]

Silence...? It just seemed strange to me as by my rough calcs you would have had a 2-3k drawdown at some stage, so I can't see how $1k could have given you $2k profit as you would have needed an extra 2-3k to cover the volatility

MIT

[Kauri]

Not too excited yet but one I am casting a lazy eye over...
Cheers
.........Kauri

[Kauri]

I wonder if finally this signals capitulation by the long Japanese?? If so.. :)

Cheers
..........Kauri

[BentRod]

maybe all those Jap chicks finally want to exit?

Nice trade too , I'm on the same one :p:

[dhukka]

I wonder if finally this signals capitulation by the long Japanese?? If so.. :)

Cheers
..........Kauri

Absolutely love it Kauri, got most of my money in yen. Wonder how low it can go if the RBA gets aggressive on rates over the next 12 months? 70 out of the question?

[Kauri]

I wonder if finally this signals capitulation by the long Japanese?? If so.. :)

Cheers
..........Kauri

I guess it might... and in no little part thanks to Fannie and Fred..

Cheers
...........Kauri