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A Sterling Peformance!
By Mike Conlon | October 15, 2009
The British pound is showing its largest gains in 8 months as there is speculation that the Bank of England is going to pause its quantitative easing (QE) as there are signs that the British economy is improving. The GBP is the highest % gainer this morning, showing gains of: +2.73% vs. JPY, +1.61% vs. USD, +1.63% vs. EUR, and +1.66% vs. CHF.
Rising asset prices and an improving unemployment picture in addition to increased confidence are fueling the rally. There is also signs of short-covering, as pound bears take profits.
One chart that looks interesting to play pound strength is the daily chart of GBP/AUD. Normally, I wouldn’t chase a pair that has already had this strong a move, but GBP/AUD hasn’t exploded like the rest of them. One of the reasons for this is because the Aussie has benefited from a rising interest rate environment and the RBA’s Reserve Bank governor Stevens has maintained that they can’t be timid on rate hikes to combat inflation.
As a result, the Aussie has benefited as being the destination for funds in the carry trade. Lets look at the chart. (click to enlarge)
While the trend for this pair is CLEARLY down, the action on the chart represents a low risk entry point for a possible trade. When I speak of trades, I’m talking about the short- to medium term timeframe. This is considered a counter-trend trade, which hopefully turns into a trend reversal (start of a new trend).
If you go long this pair (buy it), you would want to place your stop just below the 3 day low, which would be at around 1.73. While you never want to fight the trend (as it is your friend), there are times when a low risk entry can prove to be profitable. Should this pair continue to move higher, I will move up my trailing stop to just below the low price of the last three day.
Check back to see how this trade works out!
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