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British Pound Remains the Name of the Game

Terri Belkas|Currency Analyst, DailyFX.com
Tuesday, 27 May 2008 | 2:01 PM ET

It's the third official day of the currency trading portion of the contest, and the British pound remains the name of the game here. All three leading contestants held on to profits on the currency during the Memorial Day holiday, which highlights one of the biggest benefits of trading forex: they trade actively even when the stock markets are closed!

Contestant number 1 ended Memorial Day with a portfolio value of $135,548.59. This trader entered a highly leveraged short GBP/JPY position late on Thursday night as the pair consolidated near 206. Ultimately, the consolidation played out in contestant number 1's favor as GBP/JPY eventually broke down during the European trading session on Friday. What sparked this move? A broad drop in European equities. Indeed, the biggest stock indexes in the region all plummeted, as the UK's FTSE 100 closed down 1.53% at 6,087.30 while Frankfurt's Xetra DAX tumbled 1.79% to close at 6,944.05. This is a perfect example of the correlation between the Japanese yen pairs and the equity markets. While we tend to note the linked price action in pairs like USD/JPY, GBP/JPY, EUR/JPY and the DJIA more often, sharp declines or gains in Asian and European stock markets have a propensity to move the volatile Japanese yen pairs as well.

Meanwhile, contestant number 2 also traded the British pound, but instead entered a long GBP/CHF position. As of the end of the US trading session on Monday, contestant number 2 held on to a portfolio balance of $132,761.41. We have to venture to guess that this trader was utilizing technical analysis here, as the contestant bought GBP/CHF right near critical support at 2.0251 following the pair's sharp decline on Friday afternoon. While the pair fell as low as 2.0180 last week, 2.0250 has helped to stem many other major declines over the past month.

While many traders have had a lot of success selling GBP/JPY, contestant number 2 is getting a great benefit of buying GBP/CHF: the carry trade. In the UK, the Bank of England has their official Bank Rate set at 5.00%, while the Swiss National Bank has their target rate at 2.75%. As a result, when a trader buys the British pound and sells the Swiss franc, they are netting at 2.25% interest rate on the position. Of course, carry trades are never a one-way bet and these pairs are particularly prone to volatility, making them risky positions to play no matter which way you cut it.

Like contestant number 2, contestant number 3 is utilizing the benefits of carry trades as the trader bought GBP/JPY on Friday afternoon as the pair consolidated near 204.50. Contestant number 3 was clearly looking for a bit of a bottom in the area -- which happened to be the case -- as the trader held on to the position throughout the weekend and ended Memorial Day with a portfolio balance of $130.384.91.

Congratulations to our top three traders! Being patient, consistent and combining technical analysis with fundamental analysis are very good trading habits. Best of luck!

Terri Belkas, Currency Analyst, DailyFX.com

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