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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.

Labels: carry trade, fx

posted by John Wilson @ 5:45 PM Permanent Link ,

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London is currency king Sunday, September 30, 2007

London’s market share in FX grew to 34.1% from 31.3% while the US share fell to 16.6% from 19.2%, over the last three years whilst daily turnover in traditional foreign exchange instruments increased by 71% to $3.2 trillion, according to the Bank for International Settlements ("BIS").

The same report also highlighted that average daily turnover of interest rate and non-traditional foreign exchange contracts increased by 71% to $2.1 trillion in April 2007. Whilst turnover of foreign exchange options and cross-currency swaps more than doubled to $0.3 trillion per day. Less brisk growth was recorded in the much larger interest rate products arena, where average daily turnover increased by 64% to $1.7 trillion.

The derivatives market shares of London and the US were virtually unchanged from 2004 at 42.5% and 23.8% respectively.

Note to Harvey Goldsmith, the famous promoter - Looks like the Government has no issue with secondary trading of pound notes, contrary to your comments at the Parliamentary Select Committee!

Labels: fx, markets