RELATIVE VALUE: BEST EXPRESSION OF BREXIT - GBP VS USD, JPY, CHFAn analysis of which LONG has the best value against the short GBP to play the Brexit. [
- GBPUSD has a target handle of 1.385.
- GBPJPY target handle at 1.483.
- GBPCHF target handle at 1.335 .
- IMO currently i rule out GBPUSD short, as USD doesnt have the same "risk-off" demand as CHF and JPY. Also USD and GBP economies are perhaps the most highly correlated, both economically and politically out of the pairs hence Brexit downside may/ will spill over into USD uncertainty also and may cause a lack of USD demand relatively to the unlinked regions of JPY and CHF. Not to mention GU has moved 400-500pips lower (the most) in a week and short liquidity is getting tighter - i think momentum is slowing in this pair - it isnt making any lows. Also at 1.41 there is little interest to get short/ for new shorts to be added as we near the all time low handle at 1.38 - hence JPY/CHF denominations which arent at all time low levels are better expressions of downside GBP.
- I think a dynamic and better way to play the BREXIT vote is using a long CHF or JPY denominator as you get a "two-way" short. e.g. investors will be actively buying JPY and CHF to hold a risk-off asset, that hedges against volatility/uncertainty/risk that the Brexit possibility holds (even more so if polls continue to become more skewed to a Leave vote - Guardian recently posted 55% in favour of the leave) - thus by denominating CHF or JPY you benefit from the demand momentum AND the Supply momentum of everyone wanting to sell/get rid of GBP as uncertainty and perceived risks/vols increases.
- Therefore, Given the further 300pips of downside available in GBPCHF downside (300pips) relatively to JPY (100 pips) it has some way to to fall yet - especially once investors begin to realise JPY is an over expensive risk-off asset, they will demand CHF more as the next best/ cheapest way to hold safety AND GBP downside.
- Also, since Sunday night short GBPJPY has performed twice as well as GBPCHF (2x as many pips lower - however this means that now GBPJPY is becoming oversold so we should choose short GBPCHF now). The GBPJPY 2x move lower vs GBPCHF is unsurprising as historically investors seek JPY first, until long liquidity tightens (overpriced) then they seek CHF as the next best alternative. However it is important to note, that in most high risk occasions, at the point of the event CHF and JPY eventually end up at the same levels e.g. it is a time horizon difference, JPY isnt necessairly better than CHF in the long run, JPY just receives liquidity BEFORE CHF, but not more than CHF in the end.
- Illustrating this - GBPCHF has lost the LEAST to date in pips compared to GBPJPY and GBPUSD over the last while - hence why currently GBPCHF is the best short/ has the most pips available to short.
Thus assuming you have missed the short GBPJPY I advise now adding GBPCHF short as we have 300 pips until the nearby handle at 1.338 (rather JPY only has 100 pips to the handle at 1.483).
-Also one other element to note, is that EUR pairs e.g. EURJPY and EURCHF are also relatively cheaper than GBPJPY and GBPCHF - short EUR numerated shorts are also the next best/ next most valuable shorts after GBP numerations. Hence - imo once GBPCHF reaches the handle at 1.335 I will be looking to short EUR numerations as they are still relatively cheaper (The demand is for GBP as GBP is the most sensitive), however short EUR is the next most sensitive numerator as the EUROZONE is the next most affected ccy, since the UK EU Referendum directly impacts Euro area economy.
Volatility demand:
- Also not to mention GBPJPY and GBPCHF 1wk 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 we are no
