This is another way to hedge the yen carry trade and has the advantage of not having to rebalanance as the strategy can be used with one broker. It works best with a broker that pays a high rate of interest.
The strategy involves going long on GBP/JPY and short on CHF/JPY. It seems to work best using 1.8 lots of chf/jpy for every 1 lot of GBP/JPY. Historically the hedge has held out fairly well, but has not provided much in the way of the protection during a major carry unwinding.
As we are buying GBP and selling CHF, it is clearly going to have considerable correlation to GBP/CHF (it won’t be identical as the position sizes are not the same as a long GBP/CHF. I have personally never seen more than a 900 pip deviation from the starting point, so one must use a level of leverage that could accommodate such a ride. It is best to enter the position when the hedge is out of sync on the negative side. We have the option to take profit when the swing becomes positive. So potentially you can earn on the daily swap as well as the positive swings.
This is one way of hedging the carry trade, there is considerable risk in this strategy because there is always the risk that the pairs will go out of correlation and never return, this would result in a permanent drawdown. As with any strategy it is important to trade it on a demo account first and use as much risk as you feel suits you. The full carry hedge is a lower risk strategy.
