- The British Pound has rallied a bit in the early hours of Monday, as we continue to see a lot of noisy behavior, but I also recognize that this is a market that is paying close attention to multiple things at the same time.
- Keep in mind that the British Pound against the Japanese yen is considered to be a risk sensitive currency pair as the British pound offers more in the way of interest rates and swap than the Japanese yen, which of course has been the victim of the carry trade for years.
- However, the bank of Japan now is suggesting that they are going to raise interest rates to 0.75% by the end of the year.
- And while kind of pointless, it does pay something, and it does attract some money back into the Japanese mainland as the carried trade struggles. Nonetheless, I do think that there is the possibility that we bounce rather significantly given enough time. After all, the swap at the end of every day does eventually add up.
On a Move Higher
If we can break above the 190 yen level, then it opens up the possibility of a move to the 192 yen level. On the other hand, if we break down from here, it’s the 188 yen level that I will be watching very closely because it opens up the possibility of a move down to the 185 yen level. It’s worth noting that pretty much all of the yen related pairs all look the same. So I think that tells us that the Japanese yen is the main driver that’s going on overall. This chart looks quite a bit different than the British pound does against the Swiss franc, which is the other carry trade currency, mainly because the Swiss have been cutting rather aggressively. As long as Japan is not cutting, then it makes a lot of sense that we will continue to see more choppy volatility. That being said, I’m comfortable going long, not so much shorting, at least not until we break down below the latest swing below. Expect a lot of noise but expect a lot of volatility due to the shifting expectations of the carry trade in general.
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