Blog > Investment Strategies > Blog article: Investing in Currencies: How to Leverage Interest Rate Differentials
 | Email This Article Email This Article  | 

Investing in Currencies: How to Leverage Interest Rate Differentials

Posted November 16, 2007

Today’s Financial News Research Report:
How to leverage interest rate differentials between the dollar, the British Pound and the Euro, into profits.

by Adam Lass, Market Analyst, WaveStrength Options Weekly


Today’s Financial News feed provides an independent and practical perspective on the U.S. and global investment markets.
RSS feed Subscribe in a Reader or Subscribe via e-mail

 

This transatlantic rate gap is offering 60% to 100% gains on “armchair arbitrage.”

On October 31, the Federal Open Market Committee of the U.S. Federal Reserve lowered core banking rates for the third time in as many months. Previous statements that the U.S. economy was secure in its growth and inflation remained a serious threat were swept to the wayside as our central bankers chose instead to prop up a financial industry suffering primarily from its own foolish greed.

That U.S. banking is teetering on the brink is without a doubt: in the past eight weeks, mainstays such as Merrill Lynch (MER: NYSE) and Citigroup (C: NYSE) have sacked their CEOs over acknowledged losses billions in quarterly losses.

As a group, Citi, Bank of America (BAC: NYSE), Merrill, JP Morgan Chase (JPM: NYSE), Morgan Stanley (MS: NYSE), Lehman Brothers (LEH: NYSE), Bear Sterns (BSC: NYSE) and Goldman Sachs (GS: NYSE) have lost some 120 billion dollars in collective market cap, as investors abandon the sector wholesale.

A sea of red ink

Nor has the bleeding stopped. Today we were treated to yet another announcement drenched in red ink: this time, it was Wachovia’s (WB: NYSE) turn to warn that they too would join the pool of losers to the tune of some $1.1 billion dollars.

As a result of the Federal Reserve’s caving into the desperate demands of these bankers for additional liquidity, the U.S. Dollar has taken yet another tumble. As I write, the dollar has fallen 1.35% against the Euro since the announcement, adding onto the 7% loss against same since late May.

Also today we heard from Fed Chairman Bernanke, who has testified before Congress that even these efforts will not be enough to stop the steady decay in GDP growth. While he will not concede that we are headed toward recession, he has put forward that idea that the Fed has shot its wad, and has no more tools left with which to stimulate the economy without exacerbating inflation further.

Read more about this and other top investment recommendations in Adam Lass’ WaveStrength Options Weekly

Separated by an ocean of attitude

It has been said that England and the U.S. are two countries separated by a common language. Indeed, their central bankers may speak the very same language as ours, but yet they have such different things to say about such things as growth and inflation.

The Bank of England has been faced with similar woes, and yet has reacted in the exact opposite fashion: rather than drop rates, the BoE has nailed down its key interest rate with a mallet and a railroad spike.

Whereas U.S. borrowing costs are down to 4.50%, the BoE has held steady at 5.75% for the past four months. Prior to this period of stability, the Brits actually raised rates five-quarter-point increments between August 2006 and July 2007. As a result, their consumer price index has fallen from an annual rate of 3.1% in March to 1.8% in September.

RSS feed

Today’s Financial News

The News That Really Matters

Today’s Financial News offers an independent and very practial perspective on the U.S. and global investment markets. We filter out exactly what news is worth paying attention to and what it means for your money and portfolio.

Every day of the week, the Today’s Financial News feed will update you on the most important financial and
investment news, in-depth articles, no-holds-barred opinion and analysis, as well as exclusive video news covereage not covered by mainstream sources.

Subscribe in a Reader or Subscribe via e-mail

 

Seeing green

Remarkably, the Brits don’t seem to be suffering under this stiff-necked regimen: Britain’s economy expanded 0.8% Q307 over Q207 and 3.3% over Q306, and the British Pound Sterling has hit a fresh 26-year high above 2.10 dollars.

The dichotomy between Brit and U.S. central bank attitudes and habits offers a chance to make some coin on arbitrage. Here’s the root opportunity: Rydex Investing’s CurrencyShares British Pound Sterling ETF (FXB) is sitting on some $ 94,793,073 worth of British Pounds Sterling on deposited at the London Branch of JPMorgan Chase Bank. Volume in New York averages 31600 shares a day.

These shares have gained 14% since the fund’s inception in 2006. But this gain occurred during a period of relative quiescence on the part of the U.S. Fed. Over half of that growth happened In September and October.

A better place for your dollars

Anyone looking for a superior parking place for dollars could do worse than to use this simple vehicle to park them in Pounds Sterling. Those traders looking for additional leverage should look to the option series traded against the FXB in Chicago. In my WaveStrength Options Weekly service, I am recommending select deployment of same, looking for 60% gains over the next 30 days and 100% gains by 2008. Just follow this secure link for more information.

 

Investing in Currencies: Related Articles

Wachovia Chief Latest CEO on the Hotseat

Brit Pound Trumps U.S. Buck

BoE Sits Pat on Rates

SIGN UP TO JOIN WAVESTRENGTH OPTIONS WEEKLY TODAY!


This report is brought to you by Today’s Financial News – the Premier FREE Investment News Service!
RSS feed Subscribe in a Reader or Subscribe via e-mail


Related Articles


Posted by Adam Lass · Filed Under Investment Strategies 

Comments

close Reblog this comment
Powered by Disqus · Learn more
blog comments powered by Disqus