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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.
Short
by QuantumLogicTrading
3
GBPUSD: THE RUN DOWN & HOW TO TRADE - FOMC & UK EU REFERENDUM 2I suggest you check out ALL of the relevant articles that i attach to this post so that this post makes sense SEE PART 1 ALSO GBPUSD historical Price Action The findings of previous the attached "Price action history posts" led to the conclusion that referendum history clearly wasn't repeating itself however IMO because this is the case it has opened up massive opportunities - for example; - Price Action for the SUR sold off a massive 1000pips 8 weeks before the vote, then recovered 400pips 2wks leading into the vote in 2014 - such price action didnt present much trading opportunity since the risks were priced so early, many retail investors missed the big move and probably made heavy losses by shorting in the 2wks into the event when the market actually rose. - HOWEVER, the market for the UER has been trading sideways/ directionless (with a slight upwards bias) for over 16wks only gaining from 1.41-1.45, with many candles failing to hold onto their extreme high/lows - simply open-close at median levels which further confirms the lack of conviction; this has meant that GU now trades considerably ABOVE lows at 1.38 which means there is clear room for a down trend to emerge and thus we can be confident/ safe in taking SHORTS on the pair at levels signif above the 1.38, as we can assume that the market will seek out the recent 1.38 lows if a downtrend does emerge - theres a clear and nearby target for a downtrend. Fundamentals and Summary - FOMC has started its hike cycle, GU is extremely sensitive to US rates and shed well over 1000pips in the run up and after the December FOMC meeting (compared to the EURO who still trades above hike levels). Thus we can assume that future rate increases, or the speculation that they will increase, will continue to price GU lower. The UK BOE isnt likely to raise Rates until late 2017/2018 as our economy (CPI 0.3% vs US 1.1%/ Core 1.2% vs US 2.1%), thus this Monetary Policy divergence theme is likely to continue for sometime, consequently devaluing GBP consistently lower and lower in the future, as it has done before, which gives me confidence in this part of the trade. Furthermore, in the short term the UK EU Referendum will serve as uncertainty that will undoubtably drive GU down in the near term - regardless of the result as the uncertainty WILL drive rational investors from holding sterling. - I like being short sterling over the short and long term as the CB Policy divergence, imo, will serve as a consistent underlying seller of GBP over the next 1/2 years whilst the UK EU Ref provides us near term downside pressure. ALSO, being short sterling into the Ref and into future FOMC meetings means you benefit from the carry of the "event tail risks" e.g. you are positively exposed to any probabilisticly unlikely, but possible, events - which would be extremely profitable e.g. if UK vote to leave EU you have downside already placed on GBP or if FOMC steepen the hiking curve we are positioned to benefit. - As discussed earlier, over the weekend i thought using CHF or JPY to combine with short GBP or EUR may be effective as 1. CHF and JPY both havent priced lower as heavily as USD (relatively more downside value available). 2. By being long CHF/JPY on the basis of being short GBP because of Brexit risks, you are able to hold the risk-off assets which make the trade 2-way e.g. you collect the GBP Brexit uncertainty selling AND the JPY/CHF buying as investors flee to safety - such 2-way trades create exponentially more downside momentum since you have TWO drivers. TRADING STRATEGY: SELL/ FADE ANY PULL BACKS IN A PYRAMID e.g. 3@1.450, 2@1.445 & 1@1.44! SL: 1.48 - holding until June 23/24th, or 27th of July for all 2 X FOMC and the BREXIT REF event volatility carry TP: Fed hike = <1.38; Fed Hawk = 1.40; Brexit uncertainty = <1.40; Brexit YES = < 1.345. Brexit & Hike = <1.30
Short
by QuantumLogicTrading
4