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Decline in the GBP May Hurt Carry Traders

by: John Jagerson (PFX)

Bad news in the UK is driving the GBP down in value against the other majors. However, the decline has temporarily stopped at the doji from Thursday's market action, which is encouraging that we may have seen the worst of it already. The movement is pressuring some of the more popular carry trading pairs but does not look like a runaway market yet.

The issues stem from a disappointing Industrial Production number. The actual results were a monthly decline of -0.5% and a year over year decline of -0.3%. What this means is that the UK's economy is showing more signs of slowing. This is an interesting information as we prepare for a monetary policy announcement from the UK later this week. Although I am still not expecting a change, traders may begin looking for one in the near term. This release is coming on the back of very disruptive news from Citibank last week that could contribute to a perceived change in the risk environment.

I am reading a lot this morning about this impacting carry traders, which really depends on your perspective. For example, if you are solely invested in a carry trade portfolio consisting of the GBP/JPY then it may be true. On the other hand, if you are invested in a diversified portfolio (including currencies like the AUD, NZD, SEK, JPY and CHF) of other crosses, offering strong interest rate differentials, then the damage is not as bad. The difference between a major correction and a bump in the road can be attributed to managing risk rather than trying to maximize profits only.