Wednesday, November 01, 2006

Creating a trade

I was just reading an article written on, about "Theme Building". It was quite interesting as it is very similar to what I do when creating a trading Idea. I always look at an economy as an ocean liner. You cannot turn one around on a dime, rather it is a process that takes time to achieve your objective. That is the same with any economy. If a country is entering a lower rate environment it is likely to stay that way for a period of time. Also the region tends to trade in a similar fashion (although at a different timeframe and speed). Take Brazil for example. In September 2005 with their benchmark rate at 19.75% they began cutting rates. This after a runup in rates from 18.25% in January of that year to 19.75 in August. Rates remained constant from May-Sept at 19.75%. Since then rates have been in a constant trend lower (today at 13.75) with more being signaled in the future. This is a clear trend. The fundamentals for the country are strong, yield still high. To have any other position then short rates and long the Real is very costly (even if they stop cutting rates you have to fund that position at 13.75%!). I always like to find a trend (preferable with yield attached) and ride it for as long as possible. Months definitely, years in some most instances.



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