Chinese Yuan Carry Trade Currency Basket Nine Months Later

by: Bryan Moore

TheFinancialWhiz.Com started an experiment of combining a basket of nine currencies versus the Chinese Yuan (see post). The goal of the basket was to generate positive interest payments from the long currency holdings, with a secondary goal of generating capital appreciation.

The portfolio, as of Saturday, January 5, 2008, has a Net Asset Value of $143,364.22, which represents a 43.36% gain over the initial $100,000 balance. The Net Asset Value is broken down into three components: Initial Investment, Unrealized Gains (Losses), and Interest Income. The below table shows the breakdown of the current portfolio:

Initial Investment:


Capital Appreciation:


Interest Income:


Net Asset Value:


Click to enlarge

Figure 1 provides a better illustration of the percentage of capital appreciation and interest income attributed to the Net Asset Value. Interest Income, the primary goal, represented 61.22% of the gain over the Initial Investment, and Capital Appreciation, the secondary goal, represented 37.32% of the gain over the Initial Investment.

Figure 1.

Breakdown of the Chinese Yuan Carry Trade Basket

Over the nine-month test period, the Chinese Yuan Carry Trade Portfolio had a Sharpe Ratio of 1.3696. The inputs used to derive the Sharpe Ratio were a 48.61% annualized return, 5.00% risk-free rate, and a 31.84% annualized standard deviation.

The top performing position in the portfolio was the short USD/TRY (short US Dollar, long Turkish Lira) holding, which along with its superior interest rate, appreciated from 1.40636 to 1.16804, about a 17% gain over the nine-month test period. This 17% increase from capital appreciation was on top of the $5,101 received from interest payments (about 10.20% interest earned on the initial $50,000 position).

Obviously, the worst performer was the long USD/CNY (long US Dollar, short Chinese Yuan) position, which fell depreciated from 7.746 down to 7.2836, or a decline of 5.96%. However, this loss from currency movements is offset by a generous interest rate payment for holding the Chinese Yuan short, since it is a widely known fact that it is being manipulated stronger. After taking into account the interest payments received, the position is down approximately $11,946.13 or 2.38% on the initial $500,000 long USD/CNY position.

A question that has been asked many times is why the Chinese Yuan and not the Japanese Yen, the stereotypical carry trade choice. The answer for them is the fact that the Chinese Yuan is in a controlled appreciation, while the Yen can be very volatile at times. Over the test period if the USD/JPY was substituted for the USD/CNY position, the USD/JPY would have lost approximately 7.05%, but would have been partially offset by an approximate 3.22% positive interest carry, for a net loss of 3.83%. Combine the increase loss with the greater volatility of the Japanese Yen and the Sharpe Ratio drops much lower than that of the Chinese Yuan Carry Trade Basket.

Figure 2 charts the daily Net Asset Value of the Chinese Yuan Carry Trade Basket over the entire test period.

Figure 2.
NAV - Chinese Yuan Carry Trade Basket

The chart below shows a breakdown of interest payments per day on the account:

Currency Pair

Interest Payment





















USD Account Balance


Total Interest Per Day


Click to enlarge

With the account generating approximately $173.166 per day, the portfolio will generate about $63,205.59 in interest per year, which is being generated on a portfolio with a leverage ratio of approximately 5 times the account balance. The leverage ratio is fairly conservative given that retail Forex accounts allow leverage up to 50 times the account balance. The low leverage ratio lowers the risk of a margin call on the currency account.

The results of the Chinese Yuan Carry Trade Basket experiment have been surprisingly positive and while past performance is not indicative of future performance, the generous amount of interest that an investor will receive will offset the majority of downdraws that this diversified portfolio might experience.

Supplemental Charts

USD/CNY - March 20, 2007 - January 5, 2007

USDCNY - March 20, 2007 - January 5, 2007

USD/JPY - March 20, 2007 - January 5, 2007

USDJPY - March 20, 2007 - January 5, 2007

USD/TRY - March 20, 2007 - January 5, 2007

USDTRY - March 20, 2007 - January 5, 2007