With interest rates for Sterling at record low, at 0.5%, there are some speculations floating around that GBP is the currency fueling next wave of the carry trade. By some reports it is replacing Japanese Yen and US Dollar in this role. Currently FED is the source of cheap money, with rates below those Bank of Japan. By some reports speculators are increasingly turning to British Pound, with an idea that any farther quantitative easing would cheapen GBP even more.

While some trades are certainly established shorting the Pound, I seriously doubt it will replace USD or JPY in this role. First of all, these currencies are still cheaper than Sterling, making them better candidates. Second is the money supply. There are far fewer Pounds floating around compared to Dollar or Yen. Any imbalance created by abnormally one sided bets, would become bigger and faster that what happened in Yen last couple of years. We know what happened in Yen pairs when markets corrected this imbalance. It was very painful for many market participants. If this happened with GBP, correction would be even more severe. Also, Pound is expected to have interest rates on the increase again before USD or JPY. Altogether it is not the best option to borrow money for speculation.

Bank of England left interest rates on hold at the before mentioned 0.5%, still a record low. Official announcement included a pledge to extend bank’s quantitative easing program by additional £25 billion, which is less than expected given contraction in UK economy in last quarter. At the same time European Central Bank also left its benchmark rate unchanged at 1% and started to debate exit strategy. Markets appear to be digesting what all the central banks did over last few days, with not much on anything happening at the moment.

My trade from Federal debt limit- a buy in EUR-JPY. By the time post was published trade had been triggered and came to a conclusion shortly after. I was looking for a limited move, 40-50 pips, wanting to be out of it before FED policy announcement. I settled for 41 pips gain on a first sign of slowing down. Currencies reacted to news in a typical, choppy manner, but moves were not very big. Still, glad not be active during that time.

Earlier in the week I wrote about possible reversal in commodity currencies, using NZD-JPY as an example. That was done using larger time frames, with daily chart being a focus point. It suggests that move under 63.00 would confirm that this cross changed direction. In the meantime, after bouncing from this level, NZD-JPY has contracted, as if setting up next move. Market is somewhat directionless on smaller time frame, waiting for newsm, or event, to push it either way. I want to try a trade to the down side, test the waters. Sell order was placed at 64.52, targeting about 100 pips. It is not what I would classify as a “strong set up”, but it fits into a bigger picture, if just a little too early, so I’m willing to give it a shot.

Mike K.