As stocks bottom out and form a range, so do "select" carry trades.

Stocks are starting to "build a base" and trade sideways as some buying finally comes into the market.

Why would fresh buyers come into the environment when the economy stinks? Several reasons.

1. They are betting that the Fed rate cuts that started months ago are about to work their way into the economy.

2. Smart investors "get greedy when others are fearful". Well there's not been this "fearful" of a time for quite a while.

3. Bottoms usually come after something catastrophic happens. We got that when Bear Stearns (one of America's oldest and biggest Investment Banks) bit the dust.

All of this has caused buyers to come into the market which has "somewhat cancelled out" the dominance of the sellers, thus producing a sideways range (or "base" as traders call it). Check out the chart below. Click on it to enlarge it.

The Dow goes into a range and may have even "double bottomed".

Now as investors are coming back into "beaten down stocks" that they believe are of good value, they're doing the same when it comes to carry trades. They're probably not going to come back into every carry trade just yet no more than they would jump into just any stock right now.

One thing for sure is it's a "stock picker's market" right now and it's also the same in currencies. They have to be selective.

One carry trade that I believe they are starting to snatch up again is the New Zealand dollar vs. the Japanese yen (NZD/JPY). Why?

Because it's one of the highest yielding carry trades with some of the best economic conditions. New Zealand has an interest rate of 8.25% on its currency while Japan just has a 0.50% rate on its currency. So a buyer of this currency pair gets to keep the difference between these two rates.

Check out the chart below and I think you'll see that it's a value since it's "lost" a year's worth of gains. Yet it still pumps out about $15 a day in daily interest, 7 days a week. So that's about $460 a month in interest alone. So if the "fall" is over, then you can handle it if it continues sideways for a while  because you're literally making some "head way" every day (even on weekends).

NZD/JPY bottoms as stocks bottom, yet with $15 a day interest

Then once the pair turns upward, of course you're going to gain appreciation in the pair also. So there's two ways to make money in this "beaten down" pair.

New Zealand is expected to keep its rates high for quite some time according to last month's speech by their central banker. So carry trade investors should be "in the clear" for quite some time on this one if he "sticks to his guns" on that.

Sean Hyman
Currency Director
The Sovereign Society