Sellsterling
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
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.
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
TP ON BREXIT VOLATILITY: SELL GBP RALLIES & BUY RISK-OFF DIPSThought id put a piece out as my guide for the week for how to trade the 23rd UK EU Referendum vote.
IMO the first rule and most important is - DONT TRADE THE VOTE.
Trying to guess the answer is like trying to win the lottery, so instead i advise taking a position on the volatility , as volatility doesnt discriminate, it trades both ways.
Trading the volatility:
- The asset most hit by the UK EU Referendum uncertainty is FX, with GBPUSD 1wk ATM implied volatility closing the week at a whopping 48% - as high as levels from the financial crisis.
- GBPUSD spot and volatility price is trading somewhat at the mercy of the UK Polls (i suggest checking them every few hours or so for updates if you want to trade any GBP or JPY pair the next two weeks) - intuitively, when the polls have been BREXIT biased - as they were at the front of last week, we saw GU plummet to 1.40 flat and then towards the end of the week as the polls tipped towards bremain, we saw GU recover somewhat to 1.44 almost.
- I expect the same at the start of this week - GBP will open higher today as polls over the weekend tipped into BREMAIN's favour - supported by the tragedic murder of one of its supporters which consequently lead to a prohibition on campaigning and the "stay" party gaining more publicity).
-Therefore I suggest SHORTING GBP rallies as with volatility trading at the 48% level, probability supports that GBP wont be able to hold onto any strength and will at some point conceive considerable downside. Further, the BREXIT/ BREMAIN Polling balance is likely to toss and turn - (www.bbc.co.uk) - so Fading/ Selling rallies on the back of any new BREXIT/ Leave Polls out is advisable.
- GBPUSD - SELL @ 1.45/6 - lows of 1.40 from last week or 1.385 is the next support level for TP
- GBPJPY - SELL @ 151/2 - Lows of 140.5 is the next support past 148, however, 1.455 are lows from last week
- GBPCHF - SELL @ 1.39/40 - Lows of 1.338 are in sight for TP, or 1.358
- Reward for all is upward of 500pips, Risk is no more than 250pips so IMO this provides a great trading opportunity
My 3 conditions for shorting GBP on rallies is:
1. GBP must be trading "expensive" at the levels suggested above - making reversal more likely.
2. A recent poll is in favour of leaving
3. Volatility is high and Risk Reversals trade in favour - both putting a dampener on long term stability.
See my previous articles on which cross is best to trade - I still believe CHF is the best cross, it has the best long run SHORT possibilities too.
Finally, Safety assets e.g. Gold and US Bonds are tradable ON PULLBACKS also. Gold and Bonds have been on significant rallies (illustrating the market risk) recently, so I advise buying them on any 1-5% pull backs that we may/ may not get - However, the risk-off asset play was much more profitable several weeks ago (as i suggested). Much of the "easy liquidity" has been eaten up in the last 2wk rally - hence only buy pull backs.
In my opinion, the front end of the week will have the best conditions to trade in, volatility will be at its highest and i predict a level of "calmness" emerging on Wednesday/ Thursday as the result is awaited and as volume drops, thus I do not recommend trading on Weds/ Thurs - execute on the rallies expected on Monday and TP before Wednesdays London session at 8am GMT.
On a UK STAY VOTE we could see massive 5-8+% rallies in GBP (depending on how depressed it is) and mirrored strong sell-offs in JPY, Gold and Bonds - hence why i say DO NOT TRADE THE VOTE.
I will be posting updates on Volatility as soon as the market opens.
FADE THE GBP RALLY - GBPJPY & GBPCHF SHORT - 200 TO 300 PIPS TPWanted to post a quick message telling people to sell the rally for 100-200 pips dependant on how quickly you get on the short..
Volatility is trading lower (as we expect in a rally) however it WILL pick up again/ reverse once it bottoms out - which i think is now!
The trend for all GBP pairs is LOWER hence dont fight the trend with longs INSTEAD when you see GBP pairs in the green +0.7%-+1% look for good resistance levels to short.
GBP is only going to extend lower in the long run with Lower inflation (yesterdays CPI print missed at 1.2% core and 0.2% CPI) and also as Brexit sell-offs continue - this is merely a recovery from the 5 days of losses so short at these levels is a high probability low risk trade - short it whilst the volatility/ price trades expensive IMO.
Prices above 151.5 are the high probability/ lowest risk shorts possible, if we see 1.522 that is the high of the week so I suggest going 8/10 short at these levels for more than 300 pips to 1.492 low.
The reason I like short GBPJPY and GBPCHF is descibred in detail in "relative value" posts attached to this one!
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.
GBPUSD OPEN - 100 PIPS LOWER; UNDERPRICED RISK = SELL PULL BACKSA disappointing open from cable with a bears perspective.
Gapping down 100 pips to 1.435 almost immediately puts my sell limit orders (at 146.5) in "unlikely" territory of being hit this week.
On friday following the $ EMP report cable managed to rally to 1.458 - i was hopeful it would tick a few more pips upward before the slew of selling started as we move further into FOMC and Brexit event Uncertainty territory.
Reason being, i was looking for better/ safer levels to short at - cable at 1.465 is an almost CERTAIN trade (the ones i like) as the next daily support level isnt until 1.443 which means there was over 200 pips of 0 risk equity upside to be collected.
Since we are already trading well below last weeks lows at 1.436, we will likely soon test the daily support level at 1.433 then 1.430.
TRADING STRATEGY:
SELL/ FADE ANY PULL BACKS IN A PYRAMID e.g. 1@1.450, 2@1.456 & 3@1.464!
TPSL is discretionary.. i personally have my stops just above 1.48 (on my current shorts at 1.45as I will be holding until the 23/24th of june (to include the FOMC and BREXIT REF volatility) which at somepoint IMO will yield at least TP1.5x the amount of SL = 250/300pips.
FOMC hike = 1.38 or 700pips;
FOMC Hawkish = 1.41 or 400 pips;
BREXIT uncertainty = 1.40-1 or 400-500pips;
BREXIT YES = < 1.345.
Thus the risks from 1.45 are certainly skewed to the downside for cable (upside for shorts) in my opinion.
Above is my strategy for this week, given it is the last realistic week we will be able to add "risk-cheap" shorts to our portfolios (given FOMC is on the 16th and brexit ref on the 23rd).
BUT given we have already started the week lower, I think the market has finally begun to price in the cheap risk hence the 100 pips lower - you will see in my previous articles i said to short cable anything below 1.45 - which is now 150pips of upside and looking good for more!