Go Long Hungarian Forint, And Short US Dollar As Carry Currency
For those looking to capitalize on the Fed's new QE Infinity policy, opportunities in the Forex market present a way to both ride the US Dollar's decline as well as profit with interest payments.
This is known as the 'carry trade' - however today's US Dollar carry trade is a bit different than the carry trade of the past.
Hungarian Forint
The Hungarian Forint (HUF) is the currency of Hungary, an EU member. It is one of the few EU members that has not adopted the Euro. x
The introduction of the forint on 1 August 1946 was a crucial step of the post-WWIIstabilization of the Hungarian economy, and the currency remained relatively stable until the 1980s. Transition tomarket economy in the early 1990s deteriorated the value of the forint, inflation peaked at 35% in 1991. Since 2001, inflation is single digit and the forint was declared fully convertible.[1] As a member of the European Union, the long term aim of the Hungarian government is to replace the forint with the euro.
USD/HUF Technicals
If we look at a D1 Daily chart of USD/HUF, we see that the trend from the peak of 248 is down. But the line is not straight down, there are peaks and valleys. We've indicated the peaks with red arrows, which could be good selling points.
The strategy
We suggest to sell USD/HUF by using a multiple order entry system as follows:
Take 1 short USD/HUF position regardless of where the market is, using 1:1 leverage. If you are an experienced Forex trader you can use more leverage, but this strategy should not have stop losses as the idea is to hold USD/HUF short for a long time (at least several months) Then, wait for any significant move up to sell again; at least 200 pips. See the red arrows above for selling points. When you have established several trades, stay short. You will be paid interest daily, depending on your broker. Click here to read more about Forex rollover. Profits should only be taken in the valleys after positions are deep in the money. Never close all of your orders, meaning you should always have some position in USD/HUF.
Important points on this strategy
The Forint is commonly traded with the Euro, not the US Dollar. USD/HUF is offered at many brokers. But in news and analysis you will likely see HUF compared to EUR not USD. This is because there is significantly more liquidity in EUR/HUF than USD/HUF. But remember, it's possible the HUF could go down against the EUR but up against the USD. So the point here is to trade USD/HUF and not EUR/HUF. Experienced traders might use EUR/USD as a partial hedge.
Secondly, while the HUF is a liquid currency, it is still considered an exotic and can move rapidly in one direction with relatively small order sizes (it takes less money to move the HUF rapidly, compared to EUR or GBP). So you can expect big moves to happen quickly.
Finally, spreads on USD/HUF are higher than most pairs, especially during certain market sessions. This is balanced by the fact that while the spread may be 10, 20, or even 30 pips, it may move 200 or 300 pips in a day. This is not a pair you would trade for a quick profit.
Do check with your broker for the swap rates, with using leverage, this strategy could pay 50% or more per year just in interest payments.
The current central bank base rate of the Forint is 6.25%. With the USD rate being near zero, this provides a decent swap rate. With leverage, this is multiplied by the following:
Swap rate short USD/HUF = 5%
10:1 leverage, swap rate short USD/HUF = 50%. 20:1, 100% and so on. Of course as you increase your leverage you increase your risk of the HUF moving against you, which if you used small leverage would not be so difficult to wait out.
Hungarian Forint research resources
Open a Forex Account - Information about opening a Spot Forex trading account.
(Forex Risk Disclosure - Click here to read)
The risk of loss in trading foreign exchange markets (FOREX), also known as cash foreign currencies, or the FOREX markets, can be substantial.
