In the world of foreign exchange, the U.S. dollar often takes center stage, but amidst the anticipation of rate cuts by central banks, the pound is quietly becoming a favorite among yield-seeking traders. With UK interest rates at 5.25%, among the highest in the G10, the pound’s allure in the carry trade strategy is on the rise.
Currency traders are capitalizing on the pound’s high-for-longer interest rates, making it one of the best-performing carry trades in the G10. Despite concerns in the UK about prolonged high-interest rates, traders are seizing the opportunity, leading to the pound being the second-best performing currency against the dollar in 2023.
Bank of America suggests that sterling-based investors consider raising their hedges, emphasizing the potential for FX outperformance given the high policy rates in the G10. Weekly positioning data from the U.S. Commodity Futures Trading Commission reveal a substantial long sterling position, reaching $2.71 billion – one of the largest in the last decade.
The pound’s dominance in the foreign exchange market is highlighted by its liquidity, accounting for approximately 13% of daily turnover, in stark contrast to the less liquid New Zealand dollar, a popular choice for carry trades. As central banks globally gear up for potential rate cuts, the pound stands out as a robust option for traders navigating the currents of high-yield opportunities.
