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.
Decline in the GBP May Hurt Carry Traders
Happy 4th of July!
The US dollar was steady against other major currencies in morning trading here Wednesday as players remained on the sidelines before the Independence Day holiday in the US.
All 4 majors trend sideways since this morning. Thin liquidity is expected to persist until Thursday's announcements about interest rates in the UK and the euro zone. ECB is expected to keep rates on hold, while BOE is expected to raise rates by 25 basis points.
European bonds are trade lower in today’s session following an unwinding in safe haven flows as market participants jump back into equity. This is good news for carry trades.
EUR/CHF pair broke the upside trendline, but indicators are showing overbought. Might have to wait for a dip to get in.
GBP/CHF pair trend sideway with overbought conditions.
