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The Central Bank of Chile will be buying the U.S. dollars in 2008 in order to stimulate the economy by the weaker national currency.

This year, starting April 14 Chile’s central bank will be buying $50 million every day on the Forex market to increase the overal country’s currency reserves from current $18 billion to $26 billion.

This step is rather controversial as the weakening of the peso will spur the consumer prices, while the inflation in Chile is already at a highest high level since 1996. CPI was at 8.4% in March (year-to-year) with the central bank’s target value between 2% and 4%.

On the other hand, weaker peso will bust the competitiveness of the exporting companies, increasing the economy output growth. Chile is a very export-orientated country with a large part of copper in the national export. Copper is sold for U.S. dollars and, with a cheaper peso, costs of production will remain low.

Although, the dollar purchasing process probably won’t affect the U.S. dollar rate against the other currencies, as it will be performed rather slowly, without sharp interventions, it may create some additional demand that will keep dollar from the fast falls during the volatile sessions.

Risk appetite has stabilized and the carry trade found a shaky footing this past week thanks to an unusually quiet economic docket. However, this period may end up being the lull before another wave of deleveraging and high volatility. Over the past few days, though there haven’t been many market-worthy indicators that specifically influenced the taste for general risk or the health of the credit market, there have been a number of headlines that have added to the carry trade outlook.

On the positive side, the world’s largest financial corporation - Citigroup - announced it would sell $12 billion of its leveraged debt to a group of investors for 90 cents on the dollar. What’s more, major American bank Washington Mutual reportedly raised $7 billion on the market to help bolster its capital position. At the same time, there was more than a smattering of bad news. Interest in the Fed’s 9th auction through its facility lending program showed there was still overwhelming demand for liquidity. What’s more, an IMF report revealed that the group was expecting total losses from the credit crisis to reach a staggering $945 billion. Looking ahead to the coming week, we may see the carry trade back in play. The G7 will meet this weekend to discuss the financial markets; and the earnings season will begin in earnest.

Performance Update: +653 pips

What Are We Currently Long?

NZD/USD
AUD/USD
GBP/USD

Additional Information

Making profitable carry trades are not as easy as they use to be. Therefore we have created a dynamic carry basket that changes when the monetary policy outlook for a central bank changes or if there is significant event risk ahead. Follow the performance of the DailyFX Dynamic Carry Trade Basket

What is Carry Trade

All that is needed to understand the carry trade concept is a basic knowledge of foreign exchange and interest rates differentials. Money shifts from around the world in seek of the highest yield and the benefit of trading currencies is that you are dealing with countries that have interest rates, which are charged or received every single day. If you are positioned on the side of positive carry, you have the right to earn that interest, which can be quite lucrative over time.

Protective Stop-Loss

Substantial gains made from interest rate differentials provide undeniable evidence that the carry trade strategy has been very successful over the past few years. Still, this strategy involves significant risks and an adequate protective stop is required. We are using a protective stop-loss equivalent to five times the average true range. Stop losses are activated when we have a weekly close below the specified stop level.

Position Sizing

Our position size varies according to each currency volatility. Generally, the more volatile the currency is, the fewer lots we trade. For example, let’s assume you have $10,000 and you are trading 10K lots, you decide to limit your risk per trade to 3% or $300 and the 90 days average true range for the EURUSD is 100 pips. In this case, if you go long EUR/USD you could buy 3 lots, since ($10000 * 3%) divided by (0.0100*10K) = 3 lots. In case the final result is not an integer you should always rounded it down to limit your exposure.

DailyFX

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The dollar traded mostly higher against its key rivals Thursday after European Central Bank President Jean-Claude Trichet sounded less hawkish than expected. The euro and pound fell following European interest-rate decisions. The ECB left its benchmark interest rate at 4% for the tenth consecutive month, while the Bank of England cut its key rate by a quarter percentage point to 5%. The greenback overcame earlier weakness against the yen and Swiss franc on rising US stocks and Goldman Sachs CEO Lloyd Blankfein’s comment that "we’re closer to the end than the beginning" of the credit turmoil. The dollar block currencies were little changed.

The EUR/USD failed to penetrate resistance and dropped from a record high after ECB President Jean-Claude Trichet expressed optimism over the longer term inflation outlook in the EMU. Trichet said the decision to leave rates unchanged reflects the ECB’s view that the current rate is appropriate to ensure that inflation is in line with its target of a rate below but close to 2.0% in 18 months time. The pair is still below resistance in the 1.59-area and support from the uptrend.

Financial and Economic News and Comments

US & Canada

US initial jobless claims fell last week by the largest amount in over two-and-a-half years, while continuing jobless claims rose to the highest level in over three-and-a-half years. The initial jobless claims dropped 53,000 to 357,000 in the week ended April 5, the Labor Department said. The larger-than-expected fall follows a large increase the previous week. The swings in these two weeks reflect seasonal adjustment problems associated with Easter and an auto strike. The four-week moving average of new claims rose 2,500 to 378,250. The continuing claims increased 3,000 to 2.94 million, the highest since 2004. Figures on the four-week moving average and continuing claims still point towards higher unemployment. We do not see any improvement in the labor market this year.

The US deficit in international trade of goods and services rose 5.7% to $62.32 billion from January’s revised $58.96 billion, the Commerce Department said. The January trade gap was originally reported as $58.20 billion. US exports in February climbed 2.0% m/m to $151.36 billion from $148.38 billion, while imports rose at a faster pace, up 3.1% m/m to $213.68 billion from $207.34 billion. Exports jumped 20.8% y/y, while imports increased 16.4% y/y.

Europe

European Central Bank President Jean-Claude Trichet said inflation risks remain elevated but indicated no interest-rate increases as the credit squeeze threatens economic growth more than the ECB forecast. "We are experiencing a rather protracted period of temporarily high annual rates of inflation," Trichet said at a press conference in Frankfurt. Financial-market "tension may last longer than initially thought and have a broader than currently expected impact on the real economy," he said. "We believe that the current monetary policy stance will contribute" to keeping inflation under control, Trichet said. "The firm anchoring of medium- to longer-term inflation expectations is of the highest priority."

The ECB kept its benchmark interest rate unchanged at 4.0%, as expected. President Trichet said the council was unanimous in its decision to leave rates unchanged and indicated that there were no calls for a rate cut or a rate hike at the council meeting.

The Bank of England, as expected, lowered its key rate by a quarter percentage point to 5%.

Asia-Pacific

China’s economy grew at a soaring upwardly-revised rate of 11.9% in 2007, the National Statistics Bureau said. The nominal GDP rose 24.95 trillion yuan, or $3.61 trillion at current exchange rates. The bureau also raised the estimate for China’s 2006 GDP growth by 0.5 percentage point to 11.6%. Meanwhile, the dollar-yuan today fell below seven for the first time in over a decade as the dollar continues to depreciate against the yuan. It has gained 4.5% so far this year against the dollar after rising 7% in 2007.

FX Strategy Update

Hans Nilsson
Capital Market Services, L.L.C.
www.cmsfx.com

©C2004-2005 Globicus International, Inc. and Capital Market Services, L.L.C. Any information in this report is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by Capital Market Services, L.L.C. with regard to the accuracy of the data. The opinions and estimates contained herein constitute our best judgment at this date and time, and are subject to change without notice. Capital Market Services, L.L.C. accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this report. No part of this report may be reproduced or distributed in any manner without the permission of Capital Market Services, L.L.C.

The Bank of England cut interest rates by 25bp to 5.00 percent. The statement was fairly balanced with the central bank concerned about mounting growth and inflation risks.

The price action in the British pound following the rate decision illustrated the market’s confusion on how to interpret the BoE statement. The GBP/USD fluctuated within a 70 pip range for 3 hours before finally collapsing on broad dollar strength. The BoE rate decision must have been a tough one with inflation and growth both major concerns for the central bank. We will not get any further clarity on the tone of the meeting until the minutes are released on April 23rd.

The greenback is fluctuating as the US released its initial jobless claims for the week ending April 4 showing that 357,000 have filed for first time financial aids compared to the previous revised reading to 410K from 407K. The reading unexpectedly dropped 53,000. This pressured the greenback to gain a bit since the morning although the trade balance was released showing that the deficit widened to 62.3 billion worse than that prior reading of 58.2 billion. Now we are witnessing a correction in the markets as investors await the G7 meeting tomorrow in which they will talk about reviving economies.

The ECB decided to keep their rates steady at 4% as they already suffer from inflationary pressure and that there are still downside risks to growth as it was said by Jean-Claude Trichet in his statement after the rate decision. He also mentioned inflation is still high due to energy and food prices and his main priority is containing inflation since the latest data showed that medium-term inflation risks remain to the upside. The ECB expects the HICP to remain above their 2.0% target level for months to come and there the Euro Zone is going to keep seeing high inflation for quite a while. The euro is now facing a slight correction after gaining from the beginning of this morning’s session. The EUR/USD pair is trading around the major level 1.5858 while recording the all time high of 1.5913 and a low of 1.5813.

The Bank of England released their rate decisions today where the MPC decided to cut 25 basis points taking their benchmark down to 5.00% as it was widely anticipated in the markets in order to help revive the economy. The market was already priced as we see that the GBP is now fluctuating between the levels of 1.9755s and 1.9840s after the release of the interest rate decision. GBP/USD pair is currently trading at 1.9814 while recording a high of 1.9843 and a low of 1.9722.

As for the yen we currently see it depreciating against major currencies as we are noticing a correction in the market after it failed to breach the key support at 100.20s. The USD/JPY is trading at 100.45 while recording a high of 101.81 and a low of 100.02.

Crown Forex

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