GBPUSD potential bearish gartley pattern forming on 4H chartsell @1.26326. There is nice upside protection from daily lows asking as resistance around X. Also this is a good opportunity to hop on the downtrend for trend following traders!
Shortgbpusd
GBPUSD : Simple resistance based Short setup !GBPUSD faces very good resistance from 1.3240's to 60's, and we got bearish confirmation in resistance zone. So its good chance to initiate short trades in GBPUSD, but please check your rules and stops before entering. The above is just my idea to trade this GBPUSD pair. Risk Reward is also very much in our favour.
Happy Trading !
FADE SHORT GBPUSD ON RALLIES: FED KASHKARI SPEECH HIGHLIGHTSSame onld rhetoric from Kashkari - nonetheless i remain short GBP$ on rallies into 1.315/25, given DXY's advances GBP$ has been an outstanding under-performer given 1.315 is the levels we closed on friday/ opened on monday. However, Manufacturing and Construction PMIs are a risk, any topside sterling could certainly trade to the upper levels of the range (1.325) and possibly even test 1,33 - depending on the beat.
TP levels should be 50-100pips lower at 1.3100 or 1.3050, longer term trades, or bets on USD Jobs report outperforming, with UK PMIs under-performing could easily aim for 1.2910.
Risks for the PMIs are neutral going in, they have ben set higher than last, however UK data has generally outperformed, though GDP was flat and business investment negative (though better than expected). Risks for NFP are neutral-downside, given the 180k "low bar", however the downside risks are the fact weve had 2 massively outperforming prints which could see some mean reversion making this print unusually lower.. The upside is obviously the low figure and the fact ADP Non-farms came in above expectations, though only by a few 1000 and ADP-NFP correlation isnt that high.
Nonetheless, I remain short on rallies data dependent.. given the BOEs monpol changes and the FOMCs low but started hike cycle the equilibrium should be well below 1.30 - especially as PM Theresa May confirms no back doors will be used to void brexit and that will definitely go ahead.
USD STIR Fed Funds trade higher today also for september implying a 27% probability vs 24% yesterday which gives more upside arguements for USD, though long term govies today trade broadly lower across the 2-30yr curve but only marginally, with 2yrs down 2.4bps (-2.9%) on the day. Though Sterling UK 2yr govies trade 1.4bps (9.09%) lower
Fed Kashkari Speech Highlights:
Fed's Kashkari: Need More Data Before Decision on Rate Increase
Kashkari Wants to See Core Inflation on Rise Before Rate Increase
Kashkari: Fed's Governance Structure Should Stay as Is
Kashkari Hasn't Seen Inflation Increase Yet
Fed's Kashkari: Need More Data Before Decision on Rate Increase
GBPUSD/ GBPJPY: BOE POLICY DECISION & CARNEY SPEECH HIGHLIGHTSBOE's policy decision and QIR was largely inline with expectations, perhaps even 10bn better than expected on the QE side - and was very forgiving with hints towards further interest easing, though the stubborn unwillingness to realise negative rates undermined this to some extent. GBPJPY and GBPUSD shorts traded into intermediate TP levels - with GBPJPY unsurprisingly outperforming (implied vol adjusted) given USD weakness, and trading through the 133 handle (132.3 now targeted) whilst cable traded abit more firmly bid struggling to even test the 1.308 pivot, let alone break it - i think we will see a 1.308 key support break tomorrow if NFP comes in hit or beat and I am now waiting for this (gbpjpy shorts closed).
BOE Monetary Policy Decision Highlights:
BOE Aug Minutes: 0 Members Voted to Increase Rate DJ News
BOE: Six Members Voted To Expand QE Program, Three Against
BOE: Forbes, Weale And McCafferty Voted Against Expansion Of QE
BOE: QE Dissenters Saw Risk That Recent Surveys Overstate Economic Weakness DJ News
BOE: Eight Members Voted To Launch Corporate Bond Buys, Forbes Dissented DJ News
BOE: Forbes Concerned By Excessive Stimulus, Risks Of Corporate Debt
BOE: All Members Voted In Favor Of Term Funding Program
BOE: Majority Of MPC Members Expect To Vote For Further Rate Cut 0
BOE: MPC Members See Lower Bound For Bank Rate "Close To, A Little Above" Zero
BOE Aug Minutes: MPC Voted 9-0 To Lower Bank Rate To 0.25%
BOE Aug Minutes: 0 Voted to Keep Rate Unchanged
BOE Aug Minutes: 9 Members Voted to Lower Rate
BOE Signals MPC Not Contemplating A Move To Negative Interest Rate
BOE: Economic Outlook "Has Weakened Markedly" Following Brexit Vote
BOE Makes Largest Cut In Economic Growth Forecast Since 1993
BOE Cuts 2017 Economic Growth Forecast To 0.8% From 2.3% In May
BOE Cuts 2018 Economic Growth Forecast To 1.8% From 2.3% In May
BOE Sees Declines In Business Investment During 2017 And 2018
BOE Sees Business Investment Down 3.75% In 2016 Versus 2.5% Growth In May
BOE Sees Business Investment Down 2% In 2017 Versus 7.25% Growth In May
BOE Sees Housing Investment Up 1.25% In 2016 Versus 4% In May
BOE Sees Housing Investment Down 4.75% In 2017 Versus 5.25% Growth In May
BOE Sees Pickup In Inflation On Weaker Pound
BOE Sees Inflation At 2.1% In 2017, 2.4% In 2018
BOE: Measures Ensure Inflation Won't Fall Below Target In Medium Term
UK Hammond: Prepared To Take Needed Steps To Support Economy
BOE Expands Program Of Government Bond Purchases By GBP60 Bln
BOE Purchases Of Government Bonds Will Take Six Months To Complete
BOE Government Bond Buys Will Take Total To GBP435 Bln From BGP375 Billion
BOE Last Expanded Stock Of Government Bond Buys In November 2012
BOE Launches New Program of GBP10 Billion In Corporate Bond Buys
BOE Purchases Of Corporate Bonds Will Take 18 Months to Complete
BOE Will Buy Non-Financial, Investment Grade Bonds
BOE: Issuers Of Corporate Bonds Must Make "Material Contribution" To UK Economy
BOE Approves Term Funding Scheme To Provide Loans To Lenders
BOE Loans To Banks, Building Societies At "Close To" Bank Rate
BOE TFS Intended To Ensure Cut In key Rate Passed On To Businesses, Households
BOE MPC Sees Room To Expand all Four Stimulus Measures
BOE Govenor Mark Carney et al. Speech Highlights:
BOE Carney: UK Has One Of Most Flexible Economies
BOE Carney: Can't Fully Offset Economic Impact Of Brexit
BOE Carney: Package Of Stimulus Measures Is "Exceptional"
BOE Carney: By Acting Early Can Reduce Uncertainty, Bolster Confidence
BOE Carney: GBP Fall Will Boost Exports, Reduce Imports
BOE Carney: MPC Has Been "Conservative" In New Growth Forecasts
BOE Carney: Package Ensures Stimulus Will Have Maxium Impact
LONG USD VS AUD, GBP, NZD: FED EVANS SPEECH HIGHLIGHTSFed Evans was the third fed member this week to hint that at least one rate increase is on the cards, though more dovish in saying "one hike could be appropriate" vs saying "expect the fed to hike at least once this year" which we heard from Dudley/ Kaplan earlier in the week. Though in reality his speech was dovish on the margin and offered little help for the wiltering green back which has fallen 6 of the last 7 days. The most USD shunning comment was " Could See One More Rate Increase This Year 'Even Though I Prefer None'" which obviously offers no help for the USD.
Nonetheless from here and at these levels i continue to see alpha in long USD vs AUD above 0.76 and GBP above 1.33 as the RBA cut the interest rate on tuesday which imo will likely be priced into a imminent 0.74xx sell-off once this USD weakness fades, and as the BOE likely also eases tomorrow which should see cable trade into the low 1.30s if now 1.28s or beyond. NZD is also a good proxy short as the RBNZ is expected to ease by 25-50bps on the 10th which should see kiwi trade into 0.69xx or 0.67xx respectively.
Whilst USD weakness is likely exacerbated by Fed Evans dovish remarks - today the federal funds futures ticked higher, as the BOJ-miss induced safe haven demand eased today after several days of selling off and the implied prob of a sept hike steepened to 18% vs 12% yesterday.. if the Rates market can hold these gains into fridays NFP we will likely see USD trade with a bid bias vs the above. The risk going forward though in the next 1-2wks is a poor NFP print.. if we miss expectations considerably this could send USD into a selling spiral, though a firm or beat print i confidently believe will see DXY regain prowess as many of its crosses trade at attractive USD long levels e.g. EUR, GBP, AUD, NZD etc.
Fed Evans Speech Highlights:
Fed's Evans: One Rate Increase for 2016 Could Be Appropriate
Evans: Need More Confidence Inflation Headed to 2%
Evans: Could See One More Rate Increase This Year 'Even Though I Prefer None'
Evans: One More Increase Close Enough in Line With Views
Evans: Wouldn't Mind Waiting to Raise Rates Until Economy Stronger
Evans: Recent GDP Data Was Disappointing
Evans: Ability to Continue Growing Jobs A 'Pretty Good Sign'
Evans: Fed Isn't 'Behind The Curve' on Rates
Evans: Core Inflation Won't Reach 2% Until 2018
Evans: Brexit Risk Has 'Come Down'
Evans: Global Economy Growing More Slowly Than Would Have Hoped
Evans: U.S. Fundamentals Are 'Good'
Evans: Expects 2016 GDP of 2% to 2.5%
Evans: Labor Market Has Displayed Resilience
Fed's Evans: One Rate Increase for 2016 Could Be Appropriate
BUY USD VS AUD, NZD & GBP: FOMC MEMBER KAPLAN SPEECH HIGHLIGHTSMore of the same here - my USD view remains bullish against AUD, NZD, GBP from here and at these levels. Especially on the back of the RBA i still think we should see 0.745 in AUD$ today, 0.69 in kiwi on the 10th (RBNZ), and 1.28 for GBP on the 4th (BOE)
Fed Kaplan Speech Comments:
Kaplan: Expects Continued Oil Price Volatility Until Year-End
Kaplan: 1Q, 2Q GDP Figures Were Disappointing
Kaplan Expects to See More Bankruptcies, M&A and Restructuring In Energy Sector This Year DJ News
Kaplan: Dallas Fed Still Expects Full Year GDP of 2% Due to Solid Consumer Demand
Kaplan: 1Q, 2Q GDP Figures Were Disappointing
Kaplan: Dallas Fed Still Expects Full Year GDP of 2% Due to Solid Consumer Demand
Kaplan: Dallas Fed Expects Workforce Participation Rate To Go Down to 61% by 2024
Kaplan: Has Confidence Headline Inflation Will Reach 2% In The Medium Term
Kaplan: China Future GDP Growth Rates Likely to Decline
Kaplan: Brexit Impacts Will Take Time to Unfold
Kaplan: Removal of Accomodation Should Be Done in 'Gradual and Patient Manner'
Kaplan: There Has Been Significant Decline in Neutral Rate Of Interest Last Few Years
Kaplan: Expects to see one hike this year
Kaplan: Decline in Neutral Rates Makes Using Monetary Policy More Challenging
Kaplan: Structural Reforms, Fiscal Policy Should Be Used to Help Economies
BUY USD DIPS VS GBP/ NZD: DOVISH FED W. DUDLEY SPEECH HIGHLIGHTSFed Dudley was speaking At A joint New York Fed, Indonesian Central Bank Seminar On Sunday evening when he left a mixed impression for the markets to digest - saying "it is premature to rule out an interest-rate increase this year" but then on the contrary saying "Raising Rates Prematurely Would Be Riskier Than Moving Slightly Too Late" and following up that sentiment with "Investor Expectations For Flatter Path Of U.S. Interest Rates Seems 'Broadly Appropriate'" and pointing out the medium-term risks are seen skewed to the downside - all of which somewhat contradictory expecting a 2016 rate hike.
IMO these comments are more less positive news for the greenback, given the hawkish July Minutes should take precedent (despite the market weirdly selling the september hike being officially put on the table) and after the DXY lost every day last week I think it will struggle to continue this trend into this week as the drop in rate hike expectations/ fed funds rates should flatten out - Likely seeing the bulk of the dovish expectations price last week - september 25bps hike expectations fell from 25% at the beginning of the week to 12% on Friday following the miss GDP report - will likely bottom out around here to 8%min.
That said, given the BOJ's miss we could easily see further pressure on US rates this week as imo the failed big stimulus hopes are likely to fade the risk-on environment of late, and move us back into the safe haven trend that has dominated 2016 - so dont be surprised to see some more risk-off rate expectation USD selling/ bond buying - look out for consecutive moves higher in UST or moves lower in tnx.
In the medium term this still hasnt changed my view of bullish USD and at present IMO this selling wave has opened up the opp for some good USD buying entry points e.g. kiwi above 0.72, stelring at 1.33, and eur at 1.115 - kiwi and sterling the best trades as we move into RBA, BOE and RBNZ within the next 10 days which should realise considerable downside for kiwi and cable (and for those trading aussie too, tho i prefer the kiwi proxy).
Fed Dudley Speech Highlights:
-Fed's Dudley Warns It Is Premature To Rule Out an Interest-Rate Increase This Year
-Dudley Says Fed-Funds Futures Prices Seem 'Too Complacent'
-Dudley Says There Is 'Room For Improvement' in Fed Communications, But They Are Growing More Transparent
-Dudley Says His Baseline Outlook For U.S. Growth, Inflation 'Has Not Changed Much In Recent Months'
-Dudley Expects 2% Annualized U.S. Growth Over Next 18 Months
-Fed's Dudley Says Medium-Term Risks To Economy Are 'Somewhat Skewed To The Down Side'
-Dudley Says Brexit Impact Has Been Short Lived, But Longer Term Potential Fallout 'Hard To Gauge'
-Dudley Says Fed Takes Dollar Appreciation Into Consideration, But Not Targeting Any Set Exchange Value
-Dudley Says Evidence Accumulating The Crisis-Era Headwinds 'Are Likely To Prove More Persistent'
-Fed's Dudley Warns it is Premature to Rule out an Interest-Rate Increase This Year
-Dudley: Investor Expectations For Flatter Path Of U.S. Interest Rates Seems 'Broadly Appropriate'
-Dudley Says Raising Rates Prematurely Would Be Riskier Than Moving Slightly Too Late
GBPUSD: STERLING STRENGTH MYTH? ARITCLE 50 ODDS - 50% NOT HAPPENMysterious sterling strength:
1. Sterling has managed to par losses and actually rise in past days despite a number of heavily weighted factors increasing GBP downside pressure e.g. MPC M. Weale switching to the doves, PMI/ Business Optimism 8yr lows, Sterling rates markets consistently pricing >25bps of cuts to the BOE base rate (details below), the median bank forecast of the Bank of England Policy change on the 4th of August is becoming ever more dovish (e.g. calls for >£50bn QE and more than 25bps of cuts by Banks).
2. Struggling to find answers I looked at the Article 50 odds/ Implied probability from the odds aggregator (oddschecker) - to my surprise, but in support of GBP top side I have seen the market shift aggressively in the last week - with odds of a 2016 signing falling to 16.5% from 35%, but more worryingly the odds of a 2018 or later or NOT AT ALL steepening aggressively to 50% from 30% .
- 2018 or later or not at all is now the most probable outcome, worrying that this is even possible given the referendum was decided by the people in a democracy - how is this even possible? IMO it should have been mandated to be signed within a given period e.g. 1wk/ 1m.
- Even more worrying is that T. May the newly elected PM, Pre-PM was a brexit Bull and vowed that exiting the EU was her top priority and she "saw it as a way to make Britain great again". However, now if you look at the news, she is somewhat of a Brexit bear, recently stating "The Article 50 will NOT be signed in 2016" - completely writing the front end of the curve off.
3. This is likely the potential driver of sterling strength as a delayed non-signing 1) increases the time until we actually leave the EU - given there is ALREADY a clause in the article 50 agreement that states there is a 2yr "cooling off/ negotiation period" where Britain's relationship with the EU will remain exactly the same for 2yrs once the article 50 is signed - so by not signing it until mid 2017 this means technically there will be 3yrs between Brexit vote and leaving which means three years of relatively unchanged economic conditions - thus this in mind why should GBP get weaker now/ in the near-term? 2) and in turn, the above reduces BOE cutting odds - if we're not leaving any time soon the economics should be relatively flat thus no easing needed which means less GBP near-term downside.
4. Also another potential sterling topside driver is the speculation that the BOE is coming underpressure NOT to cut rates by Retail Banks as by doing so it reduces their net interest margins (lower profitability) causing restructuring/ lay-offs in the industry - LLOYDS BANKING GROUP IS AXING 3,000 JOBS AND CLOSING 200 BRANCHES AS IT RACES TO CUT COSTS IN ANTICIPATION OF AN INTEREST RATE CUT - if considered a systemic risk this could seriously reduce the probability of BOE action. Though i think it is more of a isolated issue - Lloyds likely needed to restructure anyway based on already low profitability rather than as a direct function of a potential rate cut. It is almost laughable to think 3000 jobs are being cut because of a small 25bps cut alone.
Trading implications:
1. Obviously this is a downer on GBP shorts, however, this is ONLY a suggestion for GBP strength - i could be over estimating the impact but the argument is nonetheless a solid one.
2. Still below 1.36 i stay a seller of rallies - and watch closely for the 4th of August when the BOE is expected to deliver easing which should move GBP$ to 1.25-1.28 where i will TP.
- Current implied BOE bank rate cut probabilities are priced as the following:
-Three month short sterling (GBP) rate - 66% probability of a 25bps cut, up from 64% on the 26th.
-GBP Nominal OIS Spot rate - 84% probability of a 25bps cut on the 26th, up from 76% on the 25th
-GBP 1m Fwd Nominal OIS Rate - 29bps 100% priced as of 26th, up from 26bps on the 25th.
LONG DXY / USD: HAWKISH FOMC RATE STATEMENT - SEPTEMBER HIKE?The FOMC rate statement was largely in line with expectations and to the hawkish side - with a september hike hinted at. Much of which followed the rhetoric of FOMC members in the past few weeks (see previous posts) and data (disregarding the poor -4% durable goods mom print). Perhaps the most hawkish/ promising statement made for a Sept rate hike was the fact Fed George Preferred to Raise Rates to Range Between 0.50% and 0.75% - hinting hikes are now being considered. And "Fed Could Raise Rates Later This Year, Possibly As Early As September". Though on balance the Fed did repeat the dovish phrases "low/soft" several times when regarding various measures of inflation and business investment.
This FOMC Statement holds in line with my medium run long $ view (hike based) - especially against Yen, GBP, EUR, AUD and NZD who are expected to ease and thus policy diverge.
In terms of market pricing, the Fed Funds Future Option implied probabilities of a rate cut have continued their steepening this week - following the 3wk trend with Sept/Nov now pricing a 25.9/ 26.8% probability of a hike (up from 9% 2wks ago) - Dec now has a probability of 41.8% and is showing some stability here, with a 50bps hike implied at 9.9% and rising steadily. From this the implied probability of one rate hike in 2016 is at nearly 70% (Nov+Dec) - which imo is in line, or slightly below my qualitative probability of 90%. With the probability of 2 hikes at 12.5% which is about what i would expect.
Nonetheless eyes are now focused on BOJ - which is expected to be a year changing meeting.
September FOMC Rate Decision Statement - 0.50% unchanged:
--Fed Leaves Policy Rate Unchanged, Says Near Term Economic Risks Have Diminished
-Fed Offers More Upbeat Assessment of Labor, Economic Conditions
-Fed Could Raise Rates Later This Year, Possibly As Early As September
-Federal Reserve Keeps Fed Funds Range Unchanged at 0.25% to 0.50%
-FOMC: Voted 9-1 For Fed Funds Rate Action
-Fed Leaves Discount Rate Unchanged at 1.00%
-Fed: Economic Activity Expanding At A 'Moderate' Rate
-Fed: Labor Market Strengthened, Job Gains 'Strong' in June
-Fed: Payrolls, Other Indicators Point to 'Some Increase' in Labor Utilization in Recent Months
-Fed: Market-Based Inflation Compensation Measures 'Remain Low'
-Fed: Survey-Based Inflation Expectations Measures 'Little Changed'
-Fed: Inflation Expected to Remain Low in Near Term
-Fed: Inflation Expected to Rise to 2% Over Medium Term As Transitory Effects Fade
-Fed: Household Spending Has Been 'Growing Strongly'
-Fed: Business Fixed Investment Has Been 'Soft'
-Fed Continues to Expect 'Only Gradual Increases' In Fed Funds Rate
-Kansas City Fed's George Dissents On Fed Policy Action
-George Preferred to Raise Rates to Range Between 0.50% and 0.75%
GBPUSD: TECHNICAL ANALYSIS - BEARISH MA, IV>HV, STANDEV & RRTechnical analysis - highly bearish:
MA:
1. Just crossed the 2wk and 4wk MA - this is a bearish indication + we have been below the 3m MA for several weeks unsurprisingly since brexit.
IV/ HV:
1. Realised Vols have also unsurprisingly come off, this would but bullish but brexit has distorted the longer dated HV and they are lagging - Implied vols are steepening higher than HV - particularly around the 2wks as BOE vol prices - so IV is greater than HV in the front end which is bearish, especially around BOE where we expect ALOT of bearish pressure going into the BOE as easing is expected.
Deviation Channels:
1. We Trade at the bottom of the 6m deviation channel but this is due to brexit so shouldnt be considered bullish. Looking at the 3m SD channel, this is more appropriate and shows us trading at the average 3m price - hence there is definitely more room for downside and we have just crossed the middle regression line implying we are entering some downside deviation now.
Risk-Reversals
1. 25 delta Risk reversals trade marginally bearish for GBP$, with current at -0.1, 1wks flat at 0.02 and 2wks at -0.5 - this is surprising given BOE is coming up - one would expect a larger skew to one direction - since this isnt the case it could be 1) the market is neutral on the decision e.g. not sure of the result or 2) given we have 2wks yet investors are yet to postion in the option market, which they will next week - ill keep you updated on the vol/ option space biases.
- Though 1m risk reversals trade with a clearer downside bias a -1 and 2m at -2 which shows the market expects GBP$ to trade lower in the 1-2m term - which makes sense given the economic uncertainty + BOE Easing potential.
*Check the attached posts for indepth fundamentals*
SHORT GBPUSD: CENTRAL BANK EXPECTATIONS - BOE/ ECB/ BOJ & FOMCReuters Analyst Expectations:
FOMC
1. IMPROVING DATA POINT TO SEPTEMBER RATE HIKE -
- The Fed is very unlikely to spring any surprises at the upcoming FOMC meeting, which concludes next Wednesday 27th July, but a September rate hike is a distinct possibility. The statement next week should acknowledge the apparent pick-up in second-quarter GDP growth, particularly the recent strength of consumption, and also the rebound in employment growth in June. The Fed won't commit itself to a September rate hike at the July meeting, however, hints will be eyed closely.
- Currently the 30 day federal funds rate option implied probability is consistant with the increasing chances of a September/ Novemeber hike view as the probability continues to increase to new post brexit highs e.g. 25bps FOMC hike probability for Sept/ Nov/ Dec increased to 24.6%, 25.7%, 41.6% from 18.8%, 20.2% and 39.5% yesterday. With Dec now pricing 2 hikes at 9.1% up from 7.1% - as risk markets continue to set new highs increasing confidence.
BOE
1. BOE SEEN CUTTING BANK RATE 25 BPS TO 0.25% IN AUGUST
- BoE Seen Restarting QE In August, Top Up With GBP80Bln adding to GBP375bn
- Median 60% Chance Of UK Recession In The Coming Year
- UK Economy Seen Growing 1.4% In 2016, 0.6% In 2017 (Prev Seen 1.9%, 2.1%)
- Short Sterling constant 3m Libor Option Implied cut probabilities remained flat on the day at 30% chance of a 25bps cut - however risk markets rally buoy hawkish expectations though this is fundamentally expected to impact the BOE decision since markets are rallying as a function of the BOE cutting (its a loop that the BOE will be aware of).
ECB/ BOJ
1. ECB not seen to cut rates but some analysts think there may be an extension to the maturity of ECB's APP e.g. further into 2017, though the purchase amounts is not expected to change at EUR80bln a month - nonetheless a 3m extension is an extra EUR240bn and a 6m is EUR480bn, so such an announcement on Thursday would certainly continue to fuel the rally in risk markets.
2. BOJ - there is less consensus on the BOJ meeting on the 28th, though the forecasts seem to sit between a 10-20bps cut to the key rate + an extension to the ETF purchases (Maturity and monthly purchase amounts) + an extension to the JGB purchases (maturity and monthly purchase amounts) - a BOJ surprise to the upside would undoubtably enable risk markets to continue to rally, though if it goes the other way (Kuroda underdelivers) this could be the impetus to stop the risk rally in its tracks.
Trading Strategy:
1. Short GBPUSD on Pullbacks to 1.33/4 (if we see any now - unlikely but possible if retail sales outperform and the market prices the strong CPI/Employment at the same time) - 1.305TP1 1.285TP2 1.25xxTP3.
- I posted this trade a few days ago when the short price was favourable - at these levels i DO NOT advise shorting. 1.33 is the minimum entry - I just posted this as a short confirmation/ central bank watch post.
2. The above supports the short GBPUSD play as 1) Easing from ECB/ BOJ puts pressure on the BOE to ease (as the GBP appreciates against the JPY/ EUR in this situation which is deflationairy) thus BOJ/ ECB easing increases the already consensus view that the BOE will ease - a BOE easing of 25bps cut and 80bn extension to the QE would certainly move us through 1.25. Infact I believe the 25bps cut alone is enough to do that. If BOE delivers £80bn in QE then that will move GBP even lower to perhaps 1.20/23.
- Further, on the FOMC stance, a more hawkish FED strengthens the long dollar leg of the short GBPUSD which compounds the momentum that GBPUSD can move lower as we move towards two drivers vs just the one with the BOE easing. We now have BOE easing potential combined with ever increasing FOMC hike expectations fuelling USD demand which in turn/ combined will send GBP$ lower faster.
GBPUSD SHORT: DOVISH BOE M. CARNEY SPEECH HIGHLIGHTS - AUG CUTIMO Mark Carney was very dovish on the margin, certainly reinforcing their/ my view of an August cut being 90% on the table. The most supportive statements were "MonPol Important In Cushioning Effects Of Any Relapse In Recovery In Months & Quarters Ahead", "The MPC Does Not Have The ''Luxury '' and "More Should Be Done To Cushion The Effects Of Negative Shocks" - all of which infer that an August cut is very much on the cards - especially given that the BOE has been relatively neutral as yet, whilst they have increased the offering of interbank funding by a few £100bn, apart from that the BOE is yet to make any moves in conventional policy tools, which member/ market expects the BOE to do e.g. a Bank Rate cut and/or formal QE.
I personally am short GBP$ at these levels (see attached posts), and these comments from today have certainly reinforced my position given their dovishness, even more so when combined with yesterdays minutes which said "most MPC members expect to loosen policy in August" and "detailed analysis of all available policy tools is required" - both of which go hand as 1) they want to make sure they analyse the economy properly, which takes time (July too soon) yet all members expect August to be enough time to conclude/ act upon such analysis.
Not to mention, given bank forecast a median GBP$ price of somewhere near 1.225, being short in the 1.30+ imo is certainly probabilistically favourable, especially if you are able to execute close to the Post-brexit highs of 1.35 which has held as solid resistance and imo should do for the foreseeable future given we traded to lows of 1.38 before brexit so 1.35 is very expensive post brexit. Further, the median bank forecast was for a 25bps cut in the bank rate in July (with some calling for 40-50bps), so if that was the case in July, given BOE didnt deliver, this only increases the chances of a cut in August which imo will take GBP$ to 1.25xx.
USD demand increasing - Federal Funds Rate Implied PDF prices:
Also, on the USD side, demand is increasing which compounds the GBP$ short support, as the Fed Funds Rate implied hike probabilities are continuing to steepen. For example, since yesterday, the implied probability of a September/ November hike has increased from 12%/12% to 19.5%/20.8% - with, for the first time, a 50bps hike being priced at 0.4%/0.8% respectively; Decemeber's probability also steepened to its highest level post brexit to 40% from 33.7%, 50bps at 7.5% from 3.4% and 75bps for the first time at 0.3%.
This aggressive steepening in the rate/ probability curve is likely a function of the risk-on market we are in (SPX 4 new highs in a row), with 10y rates rallying TNX, averaging +4% every day this week. Further, I think the FOMC speakers comments which have 80% been hawkish this week has also increased confidence.
Gov Mark Carney Speech Highlights
- Monetary Policy Cannot Do Everything To Counter The Impact Of The Referendum
- MonPol Important In Cushioning Effects Of Any Relapse In Recovery In Months & Quarters Ahead
- BoE July Minutes, ''Broadly Consistent With My Personal View.''
- The MPC Does Not Have The ''Luxury ''
- Far Too Early To Draw Strong Conclusions On Precise Path Of The UK Economy
- UK Economy Is Unlikely To Crash, It Is Likely To Slow
- A Sharp Fall In Currency Rate Will Provide A Shot In The Arm To The UKâs Net Exports
- More Should Be Done To Cushion The Effects Of Negative Shocks
- Past Few Weeks Have Generated Considerable Uncertainty Around UK Economy, Policy & Politics
- Monetary Policy Should Stand Ready To Move In Either Direction
- Brexit Has Increased Materially The Degree Of Uncertainty
- Some Of This Uncertainty May Dissipate, But A Good Chunk Is Likely To Linger Over Next 2-Yrs
- Uncertainty To Weigh On Domestic Spending By Both Companies & Households For Foreseeable Future
- The Amount Of Slack In The UK Economy Is Likely To Steadily Rise
LONG DXY/ USD VS GBP: HAWKISH FOMC LOCKHART SPEECH HIGHLIGHTSFOMC Lockhart was the 4th Fed this week to imo be relatively Hawkish with his words, most notably reinforcing with the others brexits near-term stability saying "Doesn't Expect 'Brexit' to Have Near Term Impact on Economy" and " So Far 'Brexit' Reaction Largely Orderly".
Most interestingly though was Lockharts view on the FOMC's positioning for future rate increases, saying "Won't Rule Out Two Rate Rises This Year" - which is extremely hawkish given most expect 1 at the most.. Back up this sentiment by insisting that the Fed is "Fed Not Behind Curve, Has Time to Decide on Next Rate Move".
Nonethless Lockhart did somewhat contradict his "rate expectations" by saying "Time for 'Cautious and Patient Approach' to Rate Policy" which surely shouldn't be the case if 2 hikes are coming - that would be on the aggressive side.
All in all, Lockharts comments go hand in hand with my Bullish medium term USD/ DXY view (see previous articles) - I like the USD vs EUR, JPY, GBP, AUD, NZD in the medium term so long DXY/ USD is favoured, even more so if 2 rate hikes were to be realised this year. At current levels short GBPUSD is my favourite expression
FOMC RATE HIKE IMPLIED PROBABILITIES
- On the likelihood of rate increases, in the past 24 hours, from the Federal Funds Rate implied probability curve we have seen rates/ probabilities firm after yesterdays "risk-break" recovery, with a 25bps September/ Nov hike steepening to 17.2% from 11.7%(Wed), and Dec setting new highs at 35.9% from 29.5% (Wed) - Dec also went on to double the probability of a 50bps hike to 5.1% vs 2.8%(Wed), giving Lockharts comments some weight.
FOMC Lockhart Speech Highlights:
-Fed's Lockhart: Fed Not Behind Curve, Has Time to Decide on Next Rate Move
-Lockhart: Time for 'Cautious and Patient Approach' to Rate Policy
-Lockhart: So Far 'Brexit' Reaction Largely Orderly
-Lockhart: 'Brexit' Will Increase Long Term Uncertainty
-Lockhart: Doesn't Expect 'Brexit' to Have Near Term Impact on Economy
-Lockhart: Bond Market Yields Largely Reflect Flight-To-Quality Buying
-Lockhart: Too Soon to Say 'All Clear' for Financial Markets
-Lockhart: 'Brexit' Not a 'Leman Moment'
-Lockhart: Still Expects U.S. to Grow by 2%, Expects More Job Gains
-Lockhart: Economy is 'Performing Adequately'
-Lockhart Says Fed Has Time to Decide on Next Rate Move
-Fed's Lockhart: Presidential Election May Be Boosting Economic Uncertainty
-Fed's Lockhart: Won't Rule Out Two Rate Rises This Year
SHORT GBPUSD @1.34 - BOE MINUTES HIGHLIGHTS - EXPECT AUGUST CUTAs expected BOE stood pat on their rate decision reiterating much of which was said last week by Gov M. Carney, the need for more analysis to be done is/ was key - " "Detailed Analysis" of All Policy Options Required" and "Extent Of Additional Stimulus Will Depend on August Forecasts".
IMO the notes were very bearish and almost but 100% chance of some sort of action in August - "Most MPC Members Expect To Loosen Policy In August". Given Brexit, and the Inflation conditions in the UK anyway a cut of the Bank Rate, if only for 12ms, makes sense to ensure a smooth transition - especially as the UK welcomes a new PM & the article 50/ Brexit negotiations are yet to get underway, this will undoubtably put some pressure on the UK economy, where much of which could be smoothed by a 25bps rate cut.
The minutes did point out interestingly that ""In the Short Run" Weaker GBP Will Boost Inflation" which makes sense, however they coupled this statement with "BOE Agents Report Some Businesses Delaying Investment", so the net impact of the Brexit event on inflation is yet to be seen.
Overall IMO the decision to hold Policy still in July was as expected however, given the median analyst had forecasted a 25bps cut, this "hawkish" response imo has opened up a beter oppourtunity to sell GBP, as in the medium-term/ post the Aug decsion GBP$ is likely to trade below the 1.28 lows, with many analysts forecasting GBP$ somewhere between 1.20-1.25.
Trading Strategy:
1. Short [email protected]/335, sell [email protected]/9 TP1 1.305; TP2 1.285 TP3 1.25XX. - I personally will not be operating SL on this trade as i believe BOE will cut in August 90%, and/or GBP$ will fall at somepoint on pure speculation, and/or as FOMC rate expectations continue to increase going into the later stages of the year.
2. Shorting any GBP rallies vs USD is also a good strategy from now on into the Aug rate cut, especially above 1.34.
*In the unlikely event GBP$ trades higher on the back of this e.g. to 1.38/9 then i still advise shorting, however, given how stable cable was trading into the event (and after the event) i dont expect much short headwinds now - you could tell the market didnt actually believe in the rate cut/ money wasnt behind the rate cut as GBP$ rose to its post brexit highs at 1.33... is that how a cross should react when money is actually backing a cut?
BOE Rate Cut/ Minutes Highlights:
Bank of England Leaves Bank Rate Unchanged At 0.5%
Bank Of England Leaves Bank Rate Unchanged At 0.5%
BOE Jul Minutes: MPC Voted 8-1 to Maintain Bank Rate at 0.5%
BOE Jul Minutes: 8 Voted to Keep Rate Unchanged
BOE Jul Minutes: 1 Members Voted to Increase Rate
BOE Vlieghe Voted to Lower Bank Rate to 0.25%
BOE: Most MPC Members Expect To Loosen Policy In August
BOE: MPC Members Had "Initial Exchange" on "Various Possible Packages"
BOE: Extent Of Additional Stimulus Will Depend on August Forecasts
BOE: "Detailed Analysis" of All Policy Options Required
BOE: "In the Short Run" Weaker GBP Will Boost Inflation
BOE: Longer-Term Outlook Depends on Inflation Expectations
BOE: Economic Activity Likely to Weaken in Wake of Brexit Vote
BOE Agents Report Some Businesses Delaying Investment, Hiring Decisions
LONG USD VS JPY, EUR, GBP: HAWISK FED BULLARD - FED FUNDS RALLYBullard is the lone Fed official forecasting just one additional rate increase, and expects modest growth over the next two and a half years. But he reiterated Tuesday he's not expecting the economy to head south. However, did go out of his way to mention a relatively dovish point "We Have Some Ammunition if We Need it During Next Recession". Nonetheless he remained hawkish net on the margin, reiterating FED Georges hawkish comments regarding the labour market "About as Good as It's Ever Been", whilst using the June NFP print to flatten any questions regarding the low May print saying "Strong June Jobs Gains Showed May Report Was 'An Anomaly'". Similarly Bullard continued with Georges sentiment of the US's post-brexit robustness stating that the "Market Reaction to Brexit Shock Was 'Satisfactory,' 'Orderly'" - and infact surprisingly pushed this hawkish brexit sentiment on to new levels of "Ultimately the Brexit Impact on U.S. Economy Will be 'Close to Zero'". This is perhaps the most hawkish/ upbeat statement i have heard form a key Fed member since the decision which is positive given Bullard's naturally dovish stance.
Bullard also stressed the need for a solid US Fiscal package to boost demand, where i have to say fiscal stimulus has almost gone forgotten about in the last 7-years post crash, given the dominance of the central banks, quoting "U.S. Badly Needs Fiscal Agenda for Boosting Economic Growth".
Once again todays "FED speaker tracker" continues to add to my long $ view in the medium term. Today already we have seen front end rates continue their aggressive recovery this week, with the fed funds rate implied 25bps hike probability now trading for Sept/ Nov at a whopping 18% vs 11.7%Mon, with Dec trading at 36.3% vs 29.2%Mon .
10y UST (TNX) rates trade up another 4% today after a 5% gain yesterday, whilst 30yrs trade 3% up on the day (TNY) - as global risk rallies. Whilst USD is trading a little weaker in the immediate term as it readjusts lower for risk-on USD selling, long USD/ DXY is my medium term view as we continue to see the US FOMC Rate curve aggressively steepen, which is likely to continue for the next week at least - steeper implied curve means hike is more likely - more likely or realised hikes = increased (in the medium-term) dollar strength. Further, we expect dovish/ easing BOJ BOE ECB over the same period, this monetary policy divergence compounds the long $ view against its 3 biggest crosses (hence the long DXY expression)
Medium term trading strategy:
1. The best expression of this medium term USD view is long DXY - as above I hold 8/10 conviction views for a number of the heavily weighted USD basket crosses based largely on likely monetary policy divergence in the medium term (FOMC Hiking whilst BOE, BOJ & ECB ease/ cut) e.g. LONG USDJPY @104 - 106.3TP1 109.5TP2; SHORT EURUSD @1.11 - 109.3TP1 107.5TP2; GBPUSD @1.34 - 131.2TP1 128.5TP2
BREXIT & GEO-POLITICAL AFTERMATH: SHORT GBPUSD - HOW TO TRADEGBPUSD
- At the end of last week GU traded to lows of 1.32 on the brexit vote, before retracing substantially to 1.39 by the end of the day.
- GU retraced 600-700pips after the brexit event IMO solely as investors took profit from their shorts (which causes buying) - thus there was no structural reason for GU recovering e.g. it was that 1.32 had mispriced GU too low for the brexit vote.
On the back of this I expect the following for GU this week:
1. I have a 8/10 short conviction on GU and ultimately believe it will trade <1.30 by weeks end for the following reasons: -
- As on friday, the bearish movements we saw on GBP were 90% fast money trades and NOT real/ slow money positioning (due to different regulations and trading strategies) therefore, this week, slow/ real money will now be able to get behind the short sterling move thus providing momentum for GBP to move lower and sub 1.30.
*Fast money is hedge funds and slow money is asset managers*
- David Cameron UK PM also resigned following the result, thus putting further downside expectations on GBP in the near-medium term particularly as it as all come at once.
- Also the BOE plans to increase its QE by 66% 350bn to 600bn to support markets but this printing increasing GBP money supply affect puts downward pressure on the GBPUSD.
- Further, members of the European parliament have asked and put pressure on the UK to make their exit faster than previously expected, this puts further uncertainty around the brexit and increases the negative impact it may have on the economy and therefore the GBP speculation is made further bearish.
- As pictured I had expected the 1.356-1.382 range that had held at the end of last week to hold for the next 24hrs and for GU to trade relatively flat (24hrs for people to make decisions on positioning) however it looks like corporations and other entities have derisked their GBP exposure over the weekend hence we opened 300pips lower at 1.342.
- With this range broken we now trade in no mans land, thus with all the negative biases my target from now is for GU to drift towards the lows set from last week for now - If the market changes significantly within the next few hours (e.g. trades back into range) i will update this view.
- My target for GBP is <1.30 with a terminal value of 1.25 within the quarter - though i consider that the supportive (no hike) policy of the FOMC will ease GBPUSD losses somewhat. This in mind shorts at these levels are fair 1.34. Alternatively, I also encourage my favourite tactic of shorting/ fading any GBP rallies to 1.38/39 however the chance of GU realising such upside imo is only 50%, with bid trading dominating
Volatility update:
Current GU ATM 50 delta vols trade at 25%, which is surprisingly 2x higher than it was last week (the risk and volatility may not be over).
1wk GU ATM 50 delta vols trade at 30%, significantly higher than last week also.
However 1ms trade 20.49% and are significantly lower than they were last week (illustrating the event risk that has elapsed).
Current GU Option demand is skewed significantly to the downside, with Puts 27.5% vs calls 22.5% thus puts are in demand by about 20% more than calls - this supports current short views (RR -5).
1wk GU demand is also skewed in favour of downside coverage, with puts at 33% vs calls 28%, (RR -5%) with puts being demanded apprx 3% more than calls - supporting the near terms view of short GU
USDJPY as a measure of market risk.
I still suggest using UJ as a measure of GBPUSD market risk - the volatility seemingly isnt over, and with near term uncertainty high, it is prudent to track UJ and use breaks of its 101.2-103.2 range as signals of net risk on or risk-off commitment .e.g. UJ higher risk on (jpy selling), UJ lower risk off (jp buying).
The risk off move for GU imo is lower in this environment, and the risk-on move is higher. Thus, IMO UJ and GU are sync'd, and the two should be used as a tool.
22ND, 23RD, 24TH TRADING STRATEGY: GBPUSD - BREXIT/ REFERENDUMIn the previous post we have used the Price Action data from the Scottish UK Referendum for GBPUSD for the 3-days on and around the vote so the 17th, 18th (vote day) and 19th (result day) of September 2014 as a gauge to forecast whats in store for Price action on Wednesday, Thursday and Friday this week (the parallel days for both of the referendums).
Reliability of the estimates made in the previous post:
1. Given the excessive absolute implied volatility (larger than 2007 levels) which is likely to be anywhere between 40-60% on the day(s) as we currently trade near 30%; and the excessive relative implied vol levels compared to the SUR, which only realised 9% at the time, which is 5-8x less than the market expects for the Brexit vote, the daily range estimate of 340-480pips for each of the 3 days on average is warranted - especially as we have already realised an ATR of 371 last week on the 17th, thus making a 480 pip range not particularly unlikely.
- Historical Vol for UER has also traded 80%+ higher already in the last 3 days compared to SUR.
- these implied and realised volatility differentials in mind, I also think the range of 1.35-1.57 is also prudent, though i think the risks are skewed to the downside of the model rather than the upside.
Trading Summary:
- For 22nd, 23rd, 24th we predict an ATR of 340pips, currently trading at 1.47 which is a 4x resistance level on the Daily, i think this range will be skewed to the downside, so I advise shorting GBPUSD >1.47 with SL at 1.484, TP anywhere from 1.46 to 1.40 for 2 reasons:
1) range trading in mind, a scalping 50-100pip strategy may also be useful given the high expected volatility and range, shorting all pullbacks to 1.47 may enable several 50-100pip TP trades.
2) Given the high expected range (340-480pips) and 500pip Standard deviation, the long-term play e.g. 1.40tp is also one I am trading as GU is likely to reach these levels in this environment of unparalleled volatility.
-Currently I am splitting my margin between scalp trades and long-term GU positions (good for portfolio diversification) at this point in time, e.g. I have a few GBP shorts with close TP and a few with longer TP targets, this reduces my macro portfolio risk:reward as you reduce the risk of the shorter trades, but increase the reward of the longer trades.
- ATM I am 8.5/10 short GBP vs USD and CHF (JPY is too volatile - 25% more so than GU and GCHF)
Risks to the Trading strategy:
- If GU breaks and holds above 1.485, my short play conviction falls massively to 2/10 (from 8.5/10) as for me it signals a potential trend reversal for GU to price higher since 1.47 has held for 6 months - I will cut all shorts past 1.485 and I am not interested in shorting GU if it holds past 1.48.
- Further, there are risks that due to massive expected volatility/ uncertainty, game theory fears everyone out of the market e.g. everyone is too scared to trade, thus the spot market trades paradoxically against the volatility and realises flat price action since there is no volume.
- This forecast and strategy is based purely on range bound trading (as guessing the direction IMO is too difficult giving the volatility/ uncertainty in the market and also as I believe the market should realise large ranges - thus validating the strat), however if the range/ price action assumptions do not hold true to some degree e.g. we trade flat or just rocket north, then the Short only strategy is obviously flawed.
*See the 22nd, 23rd, 24th Forecast PA post attached to this one which shows the forecast used*
BREXIT GBP: USE USDJPY AS A RISK-BAROMETER & WAIT FOR LONDON 8AMIndicators to check BEFORE GBP Shorting for confirmation
I also suggest using two other key pieces of information BEFORE shorting GBP.
1. Use USDJPY as a measure of market risk appetite and stability
- As you can see below UJ has traded with a tight 38pip range vs GBP$ at 180pips. Therefore we can use UJ as a measure of stability and risk appetite:
1) because of its stability - UJ isn't acting as susceptible to the volatility "noise" - with 4.5x less range; and
2) because as we know UJ is the "safe haven" FX pair which is sold massively when markets are trading risk-off. or risk averse.
- How to use UJ for GBP direction: Assuming UJ is the stable measure of risk (which has been true for the past week) it is fair to ALSO assume:
1) A rise in UJ means increased JPY selling which means there is a stronger risk-on attitude in the market as investors shed "safe yen" - buying GBP in the uncertain BREXIT environment IMO is considered the "risk-on" move - SO we can confirm GBP rallies with a rise in UJ
2) Conversely a fall in UJ means JPY buying, which means investors are seeking risk-off/ safer currency plays - selling GBP in the BREXIT uncertainty environment IMO is considered the "risk-off/ low risk" move - SO we can confirm new GBP shorts with a fall in UJ
*If you believe that the risk-on/ risk-off moves are the other way round e.g. GBP upside is the low risk play - then you can STILL use UJ as the indicator, just the other way around than above.
IMO and logically, GBP lower in this uncertain UK environment is the LOW RISK trade - especially given we traded at 1.46 8wks ago (not much downside is priced at these levels thus GBP moves lower are lower risk)
2. Wait for London open between 8am-10am GMT (4-6 hours from now)
- In these past weeks, the London open has been a key catalyst for GBP direction ESPECIALLY on the Sunday-Monday Asia which over as all of the weekend information is priced in for the biggest FX clients in LDN.
- Therefore it is prudent NOT to take a position until the big money volatility/ fluctuations/ noise is out of the way otherwise SL's may be susceptible to being hit AND MORE IMPORTANTLY, we may misjudge the market direction/ sentiment (given LDN is the largest FX Flow session).
- Several times the market direction and momentum has changed or been confirmed aggressively during the London open 8am-10am GMT so I think this indicator is a vital determinant
GBP DOWNSIDE BREXIT POSITIONING & VOLATILITY UPDATEMy FX portfolio currently consists of :
- 2Long x USDJPY @ 106.8; 2Short x GBPJPY @ 151.2 (dynamic hedge for long UJ); 2Short x GBPUSD @ 1.4570. I will add to my short GBPUSD holdings if i can get a similar price & I may add to short GBPCHF or EURCHF downside if markets make a turn for the worst as IMO CHF denominations are under-priced relatively (as discussed in the attached article).
ATM Implied Volatility and Historical Volatility:
- GBPUSD ATM IV continues to rally today, despite being in the 2 year 100th percentile, to trade at 19.15% (0.6 up) currently, 1wks 20.5% (up 1.5), 1m 29% (up 0.5) from yesterday, whilst HV continues to trade relatively flat at 10%, with ATR increasing about 10 pips on the week.
- This positive divergence in IV and HV means that GU potentiallly has almost 2x as much more volatility to show in its price action - so I expect the market to get much more rangy in the coming weeks, so anyone day trading i advise to leave GBP crosses alone and i advise a MINIMUM SL of 1 ATR which is 150 pips, as IV implies such moves will become less and less uncommon in the coming weeks.
Therefore I also suggest only play longer term 2/3wk positions so that the 150pip SL can be justified with 300+pips of upside tp.
- GU Risk Reversals on the 1wk increased to -2 (from -1.8) with the 1m trading flat at -8.7, so we can expect further downside in the pair as puts in the nearterm continue to be demanded more so than the calls - which makes sense in this highly volatile and fundamentally short environment.
Vol demand
- GBPJPY and GBPCHF1wk and 1m risk reversals in the long run are becoming negative at a higher rate/ momentum compare to USD e.g. investors are buying GBPJPY and GBPCHF Puts at an increasingly faster rate than GBPUSD puts (the change of the RR values are increasingly negative more than the GU - The GU RRs are almost already fully priced). Hence, from a future value point of view (since the demand for downside is not outpacing that of GU) we can expect, GCHF and GJPY to in the future fall at a faster rate than GU, which makes sense given the room let until the next support levels.
- GJ 1wk and 1m are at -0.9 and -7.4, whilst GCHF are at -1.2 and -5.6 (compared to GU at the above -2 and -8.7), we can see that the put demand for GJ and GCHF still has room to increase until it reaches the levels that GU is trading at hence why I like expressing GJ and GCHF even more so.
- Finally, GJ and GCHF HV trade at 19 and 15 respectively. However GJ vols are begging to trade lower, (perhaps indicating the pair is now becoming oversold) and GBPCHF HV is trending higher (indicating that sell side demand may be picking up now that the GJ expression is reaching its fully priced state, after selling off since sunday).
This supports my view from my last piece about getting short GBPCHF now vs adding shorts to GU or GJ since they are much more overweight to the downside.
GBPUSD: THE RUN DOWN & HOW TO TRADE - FOMC & UK EU REFERENDUM 1This article is a tradable summary of all of the indepth GBP$ analysis i have done recently - I aim to give you a conclusive opinion and trading plan. SEE PART 2 ALSO
I suggest you check out ALL of the relevant articles that i attach to this post so that this post makes sense
In a nutshell i am heavily short GU, about 8-9/10 @1.44/5 (@1.41 only 2/10) - so i advise shorting ANY pullbacks we get to >1.44 in the coming weeks.
- Also SHORT EU is a good trade as IMO it is heavily over brought, and hasnt priced any of the fundamental supply/demand stimulus ( e.g. EU is trading at levels higher since the dec 15th hike, March ECB cut and UK EU Ref uncertainty pricing) which all should have depressed the market lower. Thus short EU might be the better play if we dont get any GU pullbacks, since EU still has alot of downside to factor in imo.
Volatility
- The best indicator for dis-ciphering what the market has in store for GU and EU imo is implied volatility, since it uses options (actual demand/ supply of the market) to predict what the volatility will be in the future.
- Currently EU and GU on Friday both traded in their 2 year 99th and 100th percentile implied vol reading at 14.78% and 16.15 respectively.
- Furthermore, GU's IV has been trading higher everyday this week and has set new 52wk highs everyday. The volatility (time horizon) curve is severely fattened/ steepened around the next 2 weeks due to the up coming e.g.
23.55% 16.5% 16.15% 13.75% 10.25%
1m fwd 1wk fwd current 1wk ago 1m ago
- Hence, and as you can see, now (or last week or the week before that) is the time to get on the curve for GU downside since volatility has been rising and is projected, to rise into the FOMC and UK EU Ref - before tailing off quite considerably (3m fwd at 16%, 6m fwd at 13.25%).
- In addition to this we are seeing Historical Vol trade relatively flat - indicating that GU price action hasn't yet fully priced in the potential future event volatility, meaning we can expect large legs downwards in the future, since HV isnt at extremely high levels (as pictured), there is certainly room for price action vol to move higher, thus there is room for GU to trade heavily bid and shed a several more 100pips.
- Further we have seen a negative shift in Risk Reversals for GU and EU - GU the most extreme now with 1wks at -1 and 1m at -7.6 (EU -0.1 and -0.45). Risk Revs (RR) look at the Supply/Demand of OTM Call/Put options and RR is the difference between the vol of calls minus puts.. GU RR is currently growingly negative at -1 and -7.6, implying that puts are trading much more expensive than calls as their demand is higher.
GU puts are more expensive as investors over the next 1wk-1m period are increasingly demanding downside GU exposure or want to hedge their underlying length MORE than they want upside call exposure. From this skewed options market demand for puts (rather than calls) we can observe that GU downside is net what the market is positioning for, and therefore, GU downside/ short is ALSO what we should consider playing in the spot market.
Increasing volatility and decreasing RR supports SHORT positions as; 1. investors dont want to hold assets that have increased vols (it is seen as increased uncertainty and risk) and 2. investors are increasingly purchasing put options which at some level DOES represent investor sentiment in the spot market also - these are why i advise getting short if you haven't already, asap for GU to play the volatility.
TRADING CORRELATION PT 2- GBPUSD: SHORT CABLE ON NEG EUR$ CORR XOn the 1D time frame, a strong positive correlation relationship emerges - where previously on the 4h time-frame the correlation looked relationship-less and "noisy".
However, looking back at the Daily correlation over the last 2-3 years for GU and EU one noticeable and significant trend emerges -
A steep fall in correlation, either from positive-lower positive, or positive to negative, is historically ALWAYS followed shortly by a plummet/ Sell-off in GBP$.
Thus as we see below GU v EU correlation has been descending and has just turned negative - so in my opinion we should consider selling GU as if history holds true an aggressive sell off on the daily is close by .
*please see next article where i confirm this trend by looking at the Daily zoomed out*
GBPUSD: SELL/FADE CABLE ALGO SPIKE @ >1.45Unknown quantity just repriced GBPUSD right into my sell limit zone of 1.45-1.465 (see attached article).
Im recommending getting on the cheap risk NOW as FOMC and BREXIT REF can only price GU lower in the coming days/weeks - get it now whilst its cheap!
IMO there are 2 things it could have been 1. Algo/ flash buying 2. Some asia-lead Brexit poll that came back "no leave.
Either way both dont have much grounding.
HOWEVER
whatever it was MAY set us up for more GU buying today at some point so make sure you have more SELL LIMITS to take advantage of any further upside volatility that you can get some downside GBP risk cheaply!
SELL LIMITS @ 1.455, 1.460, 1.465, 1.469
