SHORT GBPUSD & FTSE RALLIES: GOV M.C SPEECH & BOE FSR HIGHLIGHTS1. *Id say a 6/10 dovish reaction by markets, GBP falling across the board & FTSE gaining. Carney seems contempt with a lower GBP and is happy to continue talking the currency lower in an attempt to use the exchange rate mechanism as a leading instrument to buoy UK economic stability (GDP, CPI, Unemp) against the potential Brexit backdrop; thus I continue my view of shorting GBP on pullbacks (my near term <1.30 is imminent, with August end 1.25xx in sight) and FTSE on rallies near 6600.
2. I continue to be surprised by the lack of coverage/ rhetoric from media in general and the BOE/ Govs regarding the UK Political situation regarding Brexit e.g. failure to sign the Article 50, PM Cameron Resignation in Oct, 70% chance Brexit happens in 2017 vs 2016.
Govenor Mark Carney Speech Highlights:
- BOE Carney: Have A Clear Plan, Putting It In Place, And It's Working
- BOE Carney: Will Take Whatever Action Needed to Support Stability
- BOE Carney: GBP Fall Was "Necessary" To Support Needed Economic Adjustments
- BOE Carney: Continues to See "A Material Slowing" in Economy Despite GBP Fall
- BOE Carney: Evidence Since Brexit Vote Consistent With Expectation of Slowdown
- BOE Carney: Want to Ensure No Question About Availability of Credit
- BOE Carney: UK Banks Have More Capital Than They Need
- BOE Carney: UK Banks Can Be "Part of the Solution, Not Part of the Problem"
- BOE Carney: "Extremely Important" That Policy Decisions Well Targeted
- BOE Carney: Negative Rates Have Potentially Counterproductive Consequences
- BOE Carney: Commercial Property Not A Big Issue for UK Banks
- BOE Carney: General Sense of Heightened Risk Aversion in Global Markets
- BOE Carney: Have Wide Range of Tools If Monetary Policy Easing Required
Financial Stability Report highlights:
- BOE Lowers Countercyclical Capital Buffer for UK Exposures to Zero from 0.5%
- BOE: Expects to Maintain CCB at Zero Until "At Least" June 2017
- BOE Move is First Easing of Policy Following Brexit Vote
- BOE: Decision Will Raise Banks' Lending Capacity by GBP150 Billion
- BOE: Decision Will Lower Regulatory Capital Buffers by GBP5.7 Billion
- BOE "Strongly Expects" Banks Will Continue to Support Real Economy
- BOE "Strongly Expects" Banks Will Continue to Support Real Economy
- BOE: Ready to Take "Any Further Actions" Needed to Support Financial Stability
- BOE: Stability of Funding Costs Should Reduce Pressure to Tighten Lending
- BOE Sees Risk of Decline in Capital Inflows Following Brexit Vote
- BOE: Persistent Fall in Inflows Would Put "Further Downward Pressure" on GBP
- BOE: Prolonged Period of Brexit Uncertainty Could Weaken Eurozone, Global Economies
Bremain
RANGE BOUND - USDJPY: TRADING STRATEGY - PART 2 Trading for this week:
1. My plan for next week focuses on point "3." from the previous post - I am waiting for risk-on or risk-off assets to confirm investor conviction by using USDJPY as a barometer for net risk sentiment. Despite the market uncertainty and high volatility UJ last week traded within a 200pip range for the between 101.3-103.3. Therefore, I consider a 60pip break of either level to confirm the conviction to a sentiment e.g. 60pips higher is risk-on (Yen selling), 60pips Lower is risk-off (Yen buying).
So of the two possibilities for this week (based on the previous post) Most likely i think is:
1) Global risk continues its recovery as I ask myself what possible risks/ events are there that could tip risk-off sentiment? My answer is none. However, there are several arguments for a risk-on bias e.g. 1) Central bank easing continues to offer risk higher e.g. a dovish RBA (5th) and BOE meeting (14th) price JPY lower and UJ higher
2) Implied vol continues dropping below realised vol, aiding bullish sentiment.
3) Brexit uncertainty continues its de-risking/ pricing as its unlikelihood increases. Further, I think Equities have another week of rallying to price before earnings uncertainty selling will become a factor.
Trading Strategy:
If Yen carries on Ranging I advise buying UJ at lows of the range e.g. between 101.3-101.9 - or you could buy at any price in the range as I have a target of 106 in the near-term and 110+ in the next 4+wks.
Alternatively, I advise placing BUY STOP orders at 103.9-104.2 (level that confirms a risk-on breakout) as there will be 80% of UJ short Stop-Losses at this level, so we will likely see a short squeeze take us 200pips up instantly once UJ trades to at or about 104.
I like owning UJ structurally in the medium term as even if UJ falls lower in the near term which is unlikely (what risk is likely to drive it lower?) as UJ trading at or below 101 (and the further it falls) the more likely the BOJ will be to launch emergency FX intervention and/or near term lower UJ increases odds of an aggressive BOJ cut at its July 28th meeting - which will make UJ trade 500pips+ higher, dependent on the measures/ aggressiveness taken.
For some background/ support for the UJ higher trade
1. based on BOJ easing, recently JPY retail sales disappointed at -1.9% vs -1.6%, as did inflation which was seen at -0.4% nationally for CPI and Core and -0.5% for the same in Tokyo + BOJ's own Core measure continued its strong MoM downtrend at 0.8% (from 0.9% last) - consistently unresponsive inflation is the single biggest driver for BOJ easing/ cutting policy, and the poor inflation has been problematic since the last cut in January 2016 so this gives further weight to another cut, especially since it was 6+ months ago.
- Also BOJ Kuroda and JPY Govt Aso and Abe had several emergency meetings last week as a result of the Brexit vote/ JPY appreciation, in which they discussed FX levels, although taking no action, such rhetoric and actions imply and give likelihood that the BOJ will take substantial action in July.
- Technically, UJ has been oversold for several weeks, even if UJ higher isnt structurally long, we should at least be able to realise a 600-800pip recovery rally before moving lower again.
Volatility
- USDJPY Realised Volatility is trading higher than implied (bullish signal) with 2wk and 1mth at 19.64% & 15.6% vs implied's trading at 11.25% & 13.43% + there are some large notional OTM call strikes at 104.2 and 105, indicating the market may have a bullish bias. Also, the UJ 1wk/1m 25 Delta Risk Reversals Trade at apprx -1.6%, and falling, indicating the market is becoming more bullish by 1) being positioned long in the spot market but buying less downside option coverage and/or 2) Speculative Demand for UJ downside puts is falling.
*Read my previous post "RANGE BOUND - USDJPY: IS THIS GLOBAL RISK RECOVERY REAL? PART 1" for analysis of last week and mo
RANGE BOUND - USDJPY: IS THIS GLOBAL RISK RECOVERY REAL? PART 1Expectations vs Reality:
1. Following the referendum decision on Friday, as expected GBP sold off 10%+, the FTSE plummeted in a similar fashion and global risk assets sold off across the board, but FTSE/ Risk recovered a significant amount of those losses into Fridays close and for the rest of the next week.. So what happened to BREXIT?
- Such behaviour would lead you to believe that the Brexit decision was all just a bad dream, with much of the price action volatility confined to Friday alone - rather where I had expected the decision on Friday to start a cascade of risk-on asset selling, as the brexit backdrop provides the perfect impetus to trigger the risk-off fear for the wider global risks e.g. US Election, Global growth, China Debt - and, ofc, the Brexit Macro economic spill-over itself.
Why did we witness this Risk Recovery Paradox?
1. I think the main reason that risk managed to avoid carrying its bid bias into this week from Friday was PM David Cameron's decision early on Friday/ Monday to 1) Resign in October and 2) Refuse to sign the Article 50 which formally/ actually starts the Brexit Negotiations - the net effect is that brexit risks have been shifted into 2017 (or never) rather than present, thus providing investor confidence to buy risk at its Friday discount (why not) and take bets on a Brexit no show (illustrated by a buoyed GBP which imo should have fallen more).
- What this combination of events now means is that Brexit now trades as a function of Political possibility rather than as a certainty because 1) By resigning in Oct and refusing to start the negotiations now, it means that Brexit itself is put on hold until at least October. Further, the fact that the above is the case, the whole "Brexit" likelihood is brought into question in itself as 1) How likely is the new PM in Oct going to sign the article 50 as soon as they get into office? I think VERY unlikely, its career suicide to start such a volatile process immediately when in office so that means the Brexit Negotiations are pushed further out and likely into 2017 (66.66% chance it occurs in 2017 now from odds-checker). 2) Will Brexit go ahead at all? I think Brexit absolutely is unlikely, as the new PM wont want the economic and political uncertainty that will follow - especially as the vote didnt happen under their leadership - imo its more likely that the new PM will forgo the blame onto Previous PM Cameron and/ or call for a re-referendum or scrap the idea completely and instead offer a solution to solve the "leave" voters problems e.g. Bid to fix EU immigration.
2. Worldwide Central Banks supportive/ Dovish statements - All Major CB have offered their support if their economy calls for it as a result of Brexit - namely the front-end of the FOMC's rate hike curve was severely flattened (Dec or 2017 hike now likely) and the BOE Gov Carney put 250bn in QE and 25bps of Int rate cuts on the cards - the net effect of these actions has been to smooth investor fear, and allow risk to rally, as low rates and QE has no doubt been the biggest driver for stocks in the last 8 years - the FTSE's recovery was/ is 100% underpinned by the BOE stance imo.
3. And the most interesting possibility is that - Investors don't believe in this risk-rally, instead it is just a micro unfolding that will eventually unravel, forcing risk to sell-off in the near future. And by looking at the stability of Gold, Bonds and Yen, this argument does carry alot of weight and is something ive been watching all week. All risk-off assets have traded flat/ higher, despite risk rallying - when risk-on and risk-off assets FAIL to maintain their negative correlation (as they are failing to do now, and are actually slightly positively correlated as they both rise) it usually means the rally is being undermined by a longer-term macro view - since liquidity is a 0 sum game in the long run, all assets cant grow at the same time, either risk must sell-off or
RISK-OFF YEAR: BREXIT & US PRESIDENTIAL ELECTION: BUY GOLD @12592016, the year of the Risk-Off Asset
Historically Gold has performed +10-20% in the 6 months into US Presidential Election years AND also by longing Gold on this pull-back it opens up the opportunity to benefit from the potential tail risk that the UK votes to "Brexit" in which Gold will likely trade through $1400.
Gold is one of my favourite plays for 2016 for these reasons so I suggest a strategy of:
Buy GOLD - 1@1259 2@1237 3@1210
Long term TP $1395 SL $1195
Short term TP $1310 SL $1195
- Near-term on a UK Vote to stay we will likely see Gold risk-on sell off towards the $1200 handle - this is a great opp to get a good average price by buying Gold on its way down as I expect Gold to trade close to $1400 by years end and into the Election.
- A UK Vote Leave will put Gold close to the $1400 level within a week.
- The time-risk are asymmetrically skewed to the upside for Gold IMO as 1) in the near term, Brexit and Global economic unbalance uncertainty buoys the precious metal; Further, the recent failure of risk markets (SP/DJ) to set new highs despite posting recovery, likely signifies the end of the equity bull run, and thus the start of the Gold bull Run.
- and 2) The US FOMC Rate Hike Cycle, US Presidential election and wider Global Economic concerns of Deflation and low-growth which is a systemic issue and is also likely to be the case for the foreseeable future (with the 2nd and 3rd largest Central Banks - ECB and BOJ under pressure - among much of the developed world) all contribute to drive the increase in risk-off/ safe haven demand for Gold over the Long-Medium term.
- Gold is selling-off due to the increased risk appetite in the market currently as the near-term Brexit risk is soothed by "Stay" biased polls - HOWEVER, with Gold Volatility trading 50% lower than it was a week ago (reflecting the settled risk this week) with current ATM at 15%, and with 1M Risk-Reversals trading with a positive call skew of 3% we can expect an upward bias over the coming weeks/ months.
- As lower Implied Vols are projected across the 12m options curve and the 12m Futures curve is also trading contango which both imply the Gold market sentiment is for the price to rise.
- Finally, as the FOMC Rate hike cycle intensifies over the medium-term, bond prices will come under pressure, thus driving further demand for Gold as the higher quality and higher return asset is sought.
BREXIT AND GEO-POLITICAL AFTERMATH: BUY USDJPY - HOW TO TRADENow that the Brexit risk has been realised the mentioned pairs above will share some correlation this week as the market changes between risk-on and risk-off as MANY on the events continually drive the sentiment shifts.
My Plan & Expectations
USDJPY
1. My conviction for UJ is long 8/10.
-UJ traded to lows of 98.9 in the midst of the brexit hype, as the market hunted for risk off. Further, as with GBP it seems entities over the weekend have increased their JPY exposure to account for the increased percieved risk within the market causing UJ to open lower at 101.6
- However, over the weekend the BOJ had a meeting with other Japanese officials to discuss their plan (an easing plan likely) to combat 1. their inflation problem and now 2. the JPY's safe haven demand strength - both of which are cured by 8/10 aggressive easing policies by the BOJ
- Thus I expect the BOJ to hold and emergency meeting this week announcing these changes to have immediate affect as UJ at 100 severely puts the brakes on their inflation growth target.
- Further, as previously mentioned the BOE, SNB, FOMC and ECB (among others) have all said since the brexit vote that they are prepared to provide liquidity to markets and their rhetoric has been very dovish.
- Thus the BOJ's new easing package which is likely to be aggressive e.g. 20bps rate cute and a large increase QE, will help depreciate the currency through increasing supply and reducing jpy demand. Further, the supportive/ dovish stance of the worlds central banks (particularly BOE and FOMC) will help ease risk aversion which in turn SHOULD reduce JPY demand therefore helping UJ trade better to the upside.
So my trading plan for UJ is to buy at levels <102 - 101/2 is ideal (we are unlikely see 99 or 100 again as the risk-off impetuses have died). UJ should hold this range between 101.2 and 103 until CB meetings are in place - I will be holding UJ in the long term through to 110-115 at least. I have 8/10 long conviction for UJ
Volatility update:
Current UJ ATM 50 delta vols trade at 37.5%, which is surprisingly 3-4x higher than it was last week (the risk and volatility may not be over).
1wk UJ ATM 50 delta vols trade at 20%, significantly lower than current at 37.5% - I think this is a function of the central bank meetings expected this week which are inflating current volatility, with 1wk far vols lower as the events will have elapsed already.
1m UJ ATM 50 delta vols trade up on the week at 15.5% though the time curve is flattening meaning UJ vol is falling over time - lower vols = better conditions for UJ buying.
Current UJ Option demand is skewed significantly to the downside, with Puts 40% vs calls 36% thus puts are in demand by about 10% more than calls - this supports nearterm risk-off views (RR -4).
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.
Markets playing tricks with my pivot points!!So after the market reached those fresh highs past 1.1400 handle the polls were still in favor of Bremain.
Thankfully I decided to abstain from referendum craziness so I didn't take the buy order as I would've in any other day of the week. Now we have breached lower levels we can have a bit more confirmation on the direction of the markets. I'm looking for congestion around 1.1100 and breakout to the initial move. I placed a pending order but that doesn't mean that you should too. Past results do not guarantee future performance. Thank you for any comments.
BREXIT WILL COME...very high numerological potential for a BREXIT! To destroy the EU with the EURO is part of the plan to the NWO.
The date today (23rd of June 2016) and the time 23:00 for BREXIT or BREMAIN is important. The number 23 is a occult number for the elite and has a numeroligic background. So the possibility for a BREXIT is higher than the official Poll numbers for BREXIT or BREMAIN show right now. BREMAIN is stronger at the moment, to let the EUR and GBP rise, so the BREXIT this night can be a lot bigger – that's at least what I think.
NEXT TARGET @1.1100 until @1.0900
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*
22ND, 23RD, 24TH FORECAST: GBPUSD - BREXIT PRICE ACTION ANALYSISUK EU Referendum (Brexit) vs Scottish UK Referendum Price Action Forecast:
- We will use the difference in ATR and volatility between the 3-day run up into UK EU Referendum (UER) and the Scottish UK Referendum (SUR) in order to forecast what we expect price action to show on the 22nd, 23rd and 24th.
2014 SUR 3-DAY EVENT (17,18.19)
1. 1-Period ATR for the 17th 18th and 19th was 110pips, 163pips and 241pips - average of 171pips
2. 3-Day range was: 280pips - 1.6240 to 1.6520
3. On the day 12noon Implied ATM vol 17th-19th was: 8.8% 79th, 8.01% 52nd, 6.97% 22nd
4. On the day 10-period Historical Vol was: 10.4%, 10.4%, 11.1%
2014 SUR 3-DAY LEAD UP (14,15,16)
1. 1-Period ATR for the 12th 15th and 16th was 73pips, 53pips and 149pips - average of 91pips
2. 3-Day range was: 150pips - 1.6150 to 1.6300
3. On the day 12noon Implied ATM vol 12, 15, 16th was: 8.82% 76th, 9.34% 87th and 8.45% 65th
4. On the day (12,15,16) 10-period Historical Vol was: 10.9%, 10.8%, 10.4%
vs
2016 UER 3-DAY LEAD UP (17, 20, 21)
1. 1-Period ATR for the 17th, 20th and 21st was 195pips, 371pips 155pips - Average of 255pips
2. 3-day Range was: 580pips - 1.4195 to 1.4775
3. On the day 12noon Implied ATM vol was: 23.2% 100th, 24.3% 100th and 20.16% 99th
4. On the day 10-period Historical Vol was: 14.1%, 19.4%, 19.2%;
*2016 UER 3-DAY EVENT (22, 23, 24) FORECAST*
1. 1-Period ATR for the 22nd, 23rd and 24th FORECAST: `293pips, 1141pips, 250pips; (171pips/91pips)*255pips = average 480pips (average adj 340pips), SD of 500pips
2. 3-day Range FORECAST: +/-1100pips - 1.4600 to 1.3500-1.5700
3. On the day Implied/ Realised ATM vol FORECAST: Event Volatility has been implying anywhere from 30%-60% over the brexit 3 day period, with ATM currently trading at 26% already.
Evaluation:
1. The price action forecast around the event suggests that we could see a 1100pip range over the next 3 days (22, 23, 24) - given that we dont know the direction of the range, we can assume a distribution of 1100pip +/- at the current trading price thus forecasting GBPUSD to trade anywhere between 1.35-1.46-1.57.
- Further, the model expects an average daily range of 480pips, with the vote day skewing the average significantly (1141pips), therefore i think a 340pip (average adjusted) daily range is more likely.
2. Combining the estimated distribution range of 1.35-1.46-1.57 with the standard deviation of the foretasted daily ranges = 500pips, the model ends up showing significant statistical relevance by backward validating itself e.g. +/- 2SD of the mean at 1.4600 is 1.5600 and 1.3600 (+/- 2*500pip).
Before knowing this the model had already forecasted a 1.35-1.57 range thus this is somewhat reassuring as the model held true when back tested using +/- 2SD. 2SD is significant as it accounts for 95% of outcomes.
- The model also estimates that the tail risk of a BREXIT would cause GBPUSD to fall -3SD which is down to <1.31 (1.46 minus 1500pips) - this is also somewhat close to what I would have expected the day after the vote.
*See the 22nd, 23rd, 24th Trading strategy post where I link this information to execution*
TRADES TO MAKE IN PREPARATION FOR A BREMAIN RESULTI don't trade news, but this is an event whose outcome I think is now relatively certain (Bremain) such that it might be worthwhile to take a small position to take advantage of the relief rally that will occur if that is the result. Naturally, I could be totally wrong on the result, but the probability of a Bremain vote is currently higher than a Brexit vote, if the bookies have anything to contribute to the discussion ... .
In any event, here are the ideas, roughly in the order of my preference:
1. Gold Short. Gold is again butting its head against the psychological 1300 resistance level here, and its been sideways between 1200 and 1300 since mid-February, having previously unsuccessfully challenged the +1300 mark in early May before giving up the ghost all the way back to 1200 by May's end. A meaningful relief rally in equities on a Bremain vote may guide the precious metal lower.
Because I'm currently in a GLD position, I've chosen to close the put wing sides of my GLD iron condors, leaving short call verticals in place to take advantage of any downturn. If the short call verticals don't hit max profit outright, I'll merely wait and buy the dip by adding the short put wings back in if there's a significant drop in price.
Trades: GLD or GDX short call verticals above current resistance.
2. TLT short/TBT long. Traders have fled risk-on assets a little bit here in advance of the referendum. As with gold, they've sought out safe havens such as treasuries, driving TLT to within 5% of its 52-week high and TBT to within 5% of its 52 week low (TBT is the inverse of TLT).
Trades: TLT short call verticals above current resistance; TBT short put verticals below current support.
3. European Indices/Index ETF's Long. Naturally, you can play US equities indices long here, but since this is uniquely a European "thing," I would think you'd want to put plays in European indices or index ETF's to get the full brunt of the relief rally and not the spillover that will occur into US markets. Although the Euro index ETF's have already experienced a bit of resurgence off of lows, they may have further upside once the referendum is over.
Trades: EFA short put verticals below current support.
4. Cable Pairs. GBPUSD is the most obvious choice for a bullish assumption, although it's already rallied from the 6/16 low by 200+ pips, although it may have another 350 pips to the upside in it (the 5/26 high).
In all of these instances, I would trade small and, if trading the underlyings directly, I would common sense in setting stops. Keep in mind that all these assets are likely to move "in tandem," so I would pick one to trade and not put on trades in the others. The reason my preference is for a gold trade is that (a) it's a mover; (b) it's already at resistance; and (c) well, to be honest, I've already got a GLD trade on that I can use to take advantage of the movement.
EUR/GBP - WILL UK STAY OR LEAVE?I am staying well out of any trades this week as i am expecting the market to be extremely volatile with the anticipation of the EU referendum. However this is just an idea that it appears traders are taking the position that they expect the UK to stay in the EU as the Euro declines as the GBP grows in strength. Stochastic/MACD/RSI all show a strong correlation that the Euro is declining in value and strength against the pound in anticipation for the EU referendum. Will wait and see how this all plans out on the 23rd June.
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
UK EU REFERENDUM/ BREXIT: BUY EQUITY RISK AND GOLD DISCOUNTEDThe UK EU Referendum has presented significant discounted buying opportunities, with many blue chip names anywhere from 5-15% down in the last 2wks.
The uncertainty regarding the UK position in the European Union has pushed investors to see Gold, Treasuries and JPY, whilst fleeing risk equities.
- IMO the next week or two will form a trend of oscillating risk-on/ risk-off asset price swings as the markets reflect the volatile investor sentiment - this opens up significant arbitrage opportunities within the equity markets and Gold - by owning both on pullbacks you then TP as the investor sentiment switches into the favour of each - as it is bound to do.
- Essentially this strategy is a volatility play (ATM volatility for Gold almost double since last month), you naturally own both "sides" of the market (risk-on and risk off), thus taking profit when the sentiment swings in the way of each of the assets.
1. My personal Favourite GOOG and FB are currently trading at an average of apprx 10% down - I advise buying GOOG and FB at these levels, in a pyramid (increase lots if further downside occurs).
- Long GOOG and FB can be used as an event scalp as I expect their values to climb 2-5% back within the week, or you can hold longer for the full 10%. GOOG and FB discounted 5-10% are high alpha and low beta trades since IMO fundamentally they operate monopoly's over the Online Marketing Market and have significant Top and bottom line figures.
- Alternatively you could pick up Nasdaq 100 Index at a 5% discount, and own the market which in the long run will pay off - although I do not advise this trade so much (3/10) as I believe equities are due a correction - especially coming into earnings.
2. Long Gold on any 2-5% pullback, which i think we will see by Tuesday is a good trade: 1) as Gold will rally on Wednesday/ Thursday as global Macro risk is hedged for the vote day. 2) In the longer run, Risk assets (spx) are due a correction, thus Gold is due to outperform and have a bull run. 3) By holding Gold on pullbacks you can benefit from the tail risk of the UK actually REALISING BREXIT where IMO Gold would rally 10% as the Global Macro environment flees to safety.
3. By playing both the long Gold and Equity on pull backs you benefit from: 1) the natural hedge of owning long risk and Risk-off assets, thus your portfolio is diversified to perform in the short run for any outcome but also in the long run. 2) you own both assets at a discount so probability is on your portfolios side.
GBPUSD: FED and Polls dependedThis pair has been a headache over the past few days. However, I think I have finally figured what this pair has been up to:
- The market underestimated the possibility of a rate hike in June until the last FOMC Meeting Minutes on May 18th. This explains the lack of real sustainable rallies since the one that took place on the 3rd of May.
- The FED has stated that a June hike is still on the table. However, skepticism around a real FED hike prior to the UK referendum has got the pair on hold.
- The latest poll on the BREXIT conducted by IG/SURVATION has show a 44% pro REMAIN against a 38% for the BREXIT supported. The pair gained positive territory after this release which has become the catalyst for this pair during the London Session.
So the question is, where is this pair going?
The GBPUSD is on a bullish channel towards a re-test of the latest FED hike level. The market has decided to prepare for this scenario of FED hiking rates. However, the idea of hiking rates few days prior a major referendum in the UK, that have direct and significant consequences in the financial markets, seems to be highly unlikely.
Markets are positioning for this event in order to retest the latest FED rate hike levels during the next Federal Funds Rate on June 15th.
On a personal note: I believe the FED will be hiking rates on June the 15th if the data matches the committee expectations. A part from the fact that if they fail to do so with a positive data, markets will loose any remaining trust on the FED regarding a gradual interest rate hiking cycle.