Volatility and the Carry Trade

If you are a currency trader or are into global macro trading you are likely familiar with the carry trade. The carry trade is when you sell a lower yielding currency in order to fund the purchase of a higher yielding currency. When you do this you are able to earn the interest rate differential and that is called "the carry."

When market volatility is high the carry trade is typically a very bad place to be as no one likes to be taking huge risks for just a few basis points a day. On the other hand when you can invest in a relatively calm market you can earn a consistent and surprisingly high return on your investment.

There are several measures of currency volatility. One of the simplest is just to look at the ATR or average true range of the specific pair. The higher the ATR the higher the volatility and conversely the lower the ATR the lower the volatility and therefore the safer the trade.

One of the newer and best ways to measure volatility is via the JP Morgan G7 and Emerging Market currency VIX indexes. They measure volatility in the currency markets in the same manner as the VIX measures volatility in the stock market. If you want to see a good use of the JP Morgan G7 VIX then go to volatility and the carry trade at The Macro Trader which focuses on global macro trading and does extensive currency trading and analytics.

Trade Hard and Be Happy,
Carry Traders