Currency Warning Profits

by | Dec 4, 2003 | Archives

A multicurrency sandwich portfolio is one of the safest means of currency speculation and is based on using existing assets, stocks, bonds, international stocks and bonds and such to take advantage of interest rates distortions. These collateral loans give leverage that can earn pure, extra profit above what that the original asset earns, when you get the investment right. This works because existing assets are used as collateral. No additional cash or investment is required.

However when you get the investment wrong the losses are leveraged as well. So when using this technique watch the currencies you hold. This is why we rushed yesterday’s warning to you that updated the recommendation of November 21st at

That message outlined how to borrow dollars, Swiss francs and invest in Hungarian forints and the South African rand. Sudden shifts in the market have altered this position, so you should beware of these currencies now. See the warnings in yesterday’s message why the Hungarian currency is collapsing. Read this warning at

Such foreign currency investing uses the principle of positive carry which means that you can borrow money at as low as 2% and earn as much as 12.50%. This gives you a 10.50% margin of error (the difference between the 12.50% and 2%). You have this much protection from fees, defaults and forex losses.

The next advantage of this strategy is that you can gain diversification into several currencies which reduces forex and default risks.

None of this guarantees profits or that the currencies you hold will rise but these forces increase the likelihood you will have added safety and profit. Plus if you make loans in overvalued currencies, there is an added chance that the borrowed currency will fall versus the currencies you hold. This brings double profit potential from forex profits as well as the positive carry.

One trick is to look for a currency that is oversold and has a high interest rate. This worked like magic for me (and my readers have reported great success as well) several years ago when I recommended taking Japanese yen loans at 1.75% and investing them in Korean won AAA rated bonds.

Here is why this deal worked and why the Hungarian crash may work in the same way somewhere in the year ahead.

From time to time currency markets panic. When they do logic is thrown out the window. Prices plummet in currencies that should be strong. In the Korean won example the won plummeted more than 30% against the Japanese yen in a very short time. I felt that the weak won was distorted because Koreans compete against the Japanese in the export of so many products such as cars (Hyundi and Kia vs. Honda and Toyota etc.), Computers, Sony Vs. Samsung etc. The devalued won meant that Korean products suddenly became 30% cheaper than Japanese goods. My bet was that the Japanese would not tolerate this. I was paid a positive carry of 13% a year (15% interest on the won less 2% loan cost for the yen) to make the bet.

I was right and when the won appreciated versus the yen. Over the next six months a 40% + profit was made.

In another example a few years ago the Turkish economy was in such a mess that a Turkish Lira denominated British Petroleum AAA rated bonds offered 100% yield (based on the expectation of a falling Turkish lira). The economy stabilized and the devaluation was not serious. Those holding that bond picked up incredible yields, especially if they were leveraged the investment with 2% Japanese loans. Returns were as high as 400% in less than a year!

In another example after a South American currency panic Mexican CETA peso three month government bonds were yielding 18%. Here is what happened if a US$100,000 worth of CDs, bonds or shares available for speculation to borrow US$400,000 worth of Japanese yen at 2% that were converted to peso bonds. Here are the details:

    Amount                   Investment                 % Earns       Amount
US$100,000 Original US$ CD Used as Collateral 7.00% US$7,000
US$400,000 Mexican peso government CETA bonds 18.00% US$72,000
-US$400,000 Yen loan 2.00% -US$ 8,00

The projected return on the US$100,000 was 71% or total earnings of US$71,000 in stead of the normal 7% that would have been earned at that time.

The point is that when markets plummet currencies often become oversold and interest rates rise too high. Here is what you want to watch for.

Look for a big depreciation in the Hungarian forint. If this happens (watch this site for updates) some interesting profit potential could develop. Interest rates are already high at 12.5%. This will be even better if long bond rates in forints rise. Once the currency starts to turn and rise in value against the euro borrow Swiss francs and invest in forint long bonds. To understand why, read tomorrow’s message.

Until then, Good investing