More on the Multicurrency Sandwich


My answer to a question from an eClub member may help you understand how to use the Multicurrency Sandwich better. Here is his message:

Subject: Re: TIME FOR THE EURO?

Gary,

This was interesting to read (despite the typos). What you should remember is the position where you are talking from. From a European viewpoint would not the best investment be a UK resident investing his/her £GBP in Euros because of the current strength of sterling. If that was borrowed money this could magnify the profit enormously with positive carry?

Regards, David

My reply:

Please excuse the typo. We are getting close to conducing our first our first course here on the farm (for details go to http://www.garyascott.com/courses/ and we are hectic in our final efforts to have everything ready. We are building one more cabin and have just put in a new road, so I am spending most of my day, digging, cutting, hammering, laying gravel etc. Plus I still have to feed the dog and the chickens and harvest the crops so I'm rushed just a little more than usual. But I still want to still get these ideas out. Normally Bill Gates and his Microsoft spell checker take care of me. Somehow he and I both failed this time.

Positive carry means that a borrowed currency pays a lower interest than the invested currency. Right now pounds pay a higher interest than euros. Indeed it may be a good speculation to invest pounds into euro, but you are paying a price (the lower interest). If you can get 6% on a 100,000 pound CD and 4% on the equivalent in euros, it costs 2,000 pounds to speculate for the year. The euro has to rise more than 2% just to break even. The euro has to rise more than 2% for you to earn a profit.

On the other hand if you borrow $100,000 worth of Japanese yen at 1.5% and invest it in euro at 4%, you are paid the equivalent of $2,500 to take the speculation. That $2,500 is the positive carry. The yen must now rise 2.5% before you lose on your investment.

When using the multicurrency sandwich I always look to borrow a currency I feel is overvalued (as I do now with the yen) that has a low interest rate. I then look to invest in a currency I feel is undervalued. The problem with the euro is, as a new currency I have no basis to determine whether it is undervalued or not.

I hope this clarifies what positive carry is and that it helps bring you good investing!

Gary


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