Could USD and GBP become carry trade currencies Thursday, December 18, 2008
With US interest rates around/at zero and sterling interest rates poised to fall further, could these two currencies become the funding source of carry trades?
A carry trade is a strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate [Investopedia].
For years, investors have been borrowing japanese yen and investing in currencies paying higher interest rates. Provided interest rates remain stable, these can be profitable trades which can be amplified by leverage. Of course, they can go horribly wrong and investors have to remain alert in case they need to quickly unwind their positions as fx rates move against them.
Whilst many of the world's interest rates have fallen sharply, there are still some currencies that may offer some potential for investors, provided the fx rate volatility don't terrify you. Current interest rates around the world can be found here.
Of course, it does rely on being able to easily borrow funds in USD and GBP which isn't the experience for many at present. But don't worry, the central banks in both countries appear to be priming the currency printing presses to head off deflationary worries, so borrowing may become easier.