FX traders rake in a fortune from carry trade strategy on 2:1 leverage currency ETF

FX trading via a futures exchange with 2:1 leverage and an 8% increase in return year on year? How?!


The global FX ecosystem, whether traders, brokers or institutional providers, has for the most part retained a very separate nature to the futures and listed derivatives businesses, their entire business structures being completely different from each other from origin to end user.

Traders of listed derivatives on Chicago’s giant and highly technologically advanced futures exchanges, CME Group, IntercontinentalExchange and CBOE, with their dedicated retail futures platforms that connect to venues, large portfolios which are as diverse in their asset classes as they are adverse to spot transactions conducted via MetaTrader 4 using aggregated bank liquidity feeds.

Despite ground-up redressing of regulatory structures to ensure that central counterparties process trades and reporting is conducted in a transparent fashion in these post-Dodd Frank and MiFID times of completely redesigned trading infrastructure, the OTC world has not gained any more similarity to the exchange traded futures world. Not one jot.

There are always exceptions of course – and in the case of certain institutional FX traders recently, a new dynamic has emerged in which the ability to capitalize on the spread between record low yields in some developed markets compared to higher yields in other areas. Effectively, taking a global view, especially with regard to the G10 countries, has been instrumental to high gains by using this method.

How it works, and how the profits are gained

Experienced traders have been benefitting from this strategy, which is known as ‘carry trade’ via a currency-based exchange traded fund (ETF) rather than spot transactions.

This particular carry trade, in which investors borrow in Group of 10 (G10) currencies with low interest rates and use the cash to buy assets in higher yielding markets, is set for its largest annual gain since 2012.

One of the key factors that has assisted the profitability by traders by using the carry trade strategy is that various monetary policies in certain regions of the world have reduced rates to very low levels.

James Ong, Senior Macro Strategist at Invesco this week explained to Bloomberg “Central-bank policy is always going to be the number-one driver of our strategy. The ability to acknowledge the valuation and policy dynamics in Japan was the number-one thing that helped us. Diversifying some of our trades away from being dollar trades also helped as well.”

In many cases, investors may implement the carry trade strategy by borrowing on cheap Japanese yen and buying higher yielding New Zealand or Australian dollars, for example.

“Aussie and Kiwi have been moving, despite central banks saying more cuts may be in the pipeline,” Ugo Lancioni, a money manager at Neuberger Berman Group LLC, told Bloomberg. “Capital appreciation has allowed the strategy to perform well” he said.

A very good example of this is Deutsche Bank’s G10 Currency Future Harvest Index.

The very same banks that are restricting credit to prime brokerages and OTC derivatives participants which is driving technological advancement in terms of creating greater prime brokerage relationships, and meanwhile raising the capital that is required to get a prime – 5 years ago, $5 million may have got a prime whereas today it ranges between $25 million to $100 million – are the same banks that are the handlers of most OTC interbank FX in the world and yet are still allowing traders to capitalize via ETFs.

Taking a closer look at the Deutsche Bank G10 Currency Future Harvest Index, it consists of FX futures contracts on specific G10 currencies and is designed to exploit the trend that currencies associated with high interest rates tend to rise in value relative to currencies with low interest rates.

The available currencies on the fund are U.S. dollars, euros, Japanese yen, Canadian dollars, Swiss francs, British pounds, Australian dollars, New Zealand dollars, Norwegian krone and Swedish krona.

This particular index, which is up 5% year to date and almost 9% compared to the previous full year takes a two-to-one leverage (once again marking out the futures industry’s disdain for leverage and one of the reasons why FX traders go OTC), going long currency futures with relatively high yielding rates and taking short positions in currencies with low yielding interest rates. DBV is currently long 33.0% New Zealand dollar, 32.9% Australian dollar and 32.0% Norwegian Krone while short -31.3% Swedish Krona, -31.5% Swiss franc and -31.9% euro.

Photograph: Royal Exchange Buildings, London. Copyright FinanceFeeds

Read this next

Digital Assets

Metacade Presale Hits Final Stage Before Listings, Raising Over $500k in under 24 hours

Metacade, fast becoming the most exciting GameFi project in 2023, has reached the final stage of its token presale after raising more than $500k in 24 hours, reaching a total raise of $12.4m.

Digital Assets

KyberSwap announces first ever $ARB token liquidity pools, liquidity mining and trading campaigns on Arbitrum

Since launching in 2021, Arbitrum has emerged as one of the most promising Layer 2 solutions, with its ability to scale Ethereum and enable faster and cheaper transactions.

Digital Assets

Exness, Pepperstone, ThinkMarkets, TMGM tap Crossover’s execution-only crypto ECN

“We are delighted with the financial backing of global industry leaders in retail brokerage, market making, quantitative trading, banking, and crypto-native firms. Our consortium partners share our vision and have paved the way to create scale and opportunities for other industry participants to join our platform and participate in future rounds.”

Digital Assets

MetaMask taps MoonPay for fiat to crypto on-ramp in Nigeria

“Our partnership with MetaMask will enable us to provide Nigerian users with Bank Transfers, a widely used payment method across Nigerian e-commerce businesses. We hope this integration opens the doors for Nigerians to fund their self-custody wallet through a simplified user experience.”

Crypto Insider

Dubai Multi Commodities Centre picks Enya Labs as technology partner

Dubai Multi Commodities Centre (DMCC) has tapped Enya Labs as an ecosystem partner as it seeks to expand Dubai’s leading position as a global hub for digital assets.

Institutional FX

Advanced Markets integrates PrimeXM’s XCore trading and aggregation engine

“Advanced Markets Group has been at the forefront of liquidity innovation since its establishment in 2006. This strategic move, to further enhance our liquidity offering, is testament to our commitment to continue providing our clients with reliable and robust solutions that meet their needs.”

Digital Assets

Bybit taps Paradigm to launch spread trading on USDT-margined instruments

“We are thrilled that our collaboration with Paradigm has enabled us to provide traders with a more streamlined experience when it comes to spreads trading on USDT margined instruments. This launch further demonstrates Bybit’s commitment to bringing next level opportunities to our clients via superior trading experiences with top notch partners.”

Inside View

How to Help Your Traders Continue Trading in Bear Markets

“If you’re going to be in this game for the long pull, which is the way to do it, you better be able to handle a 50% decline without fussing much about it.” 

Digital Assets

Celsius to repay +70% of custody account holders’ claims

A New York bankruptcy judge today approved a deal struck between troubled crypto lender Celsius Network and its “custody account holders” that will allow them to begin immediate withdrawals of 72.5% of their claims.