SELL GBPUSD Selling pound at 1.1268 stops above 1.1333 targets below 1.1068. Use proper money management.
Shortcable
SELL GBPUSDGBPUSD Sell at 1.1717 targets at 1.1485 stops above 1.1754. Pounds is bearish the spike in price is price manipulation.
SELL GBPUSDWith a high inflation rate we are seeing one of Sterling's worst times, Short gbpusd at 1.1491 sl at 1.1548 tp at 1.1318 Use proper money management.
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*
GBPUSD SHORT: BOE/ FOMC POLICY EXPECTATIONS INCREASINGLY BEARISHFollowing today's Service/ Manufacturing PMI miss (worst contraction in 88 months - since 2009) the Sterling market has come under significant pressure as BOE rate cut expectations increase with OIS rates markets pricing a 94% chance of a 4th Aug cut vs 85% before the PMI's were released.
Further, the PMI misses has attracted attention from UK Politicians e.g. Chancellor Hammond - which puts further qualitative pressure on the BOE to cut, rather than just quantitative data prints - Political pressure combined with data pressure is the best us GBP sellers can ask for when looking for a BOE rate cut.
I have to say this is a breath of fresh air for GBPUSD shorts that i am holding (cable trades down to 1.30xx) - given that the start of the week was the complete opposite, with strong CPI/ Employment and Hawkish comments from MPC members Weale and Forbes; all of which reducing the pressure on the BOE to cut and thus the sterling market.
Below also, following the PMIs we see Aug 4th BOE expectations from BoAML/ JPM - which call for a 25bps cut and 50bn addition to QE (with increased near-term pressure to do so/ act post-PMI) - in which imo will send GBP$ to 1.25, if not through - these expectations are encouraging for shorts thougb it should be remembered the cut was expected in July also but didnt materialise (though the minutes from the meeting did state "most members expect to ease in August". Further we see fresh recession concerns emerge as from Barclays below - once again putting downside pressure on GBP through poor GDP and increased BOE cut likihoods.
Further, on the USD side of the trade, in this risk recovery we continue to view FOMC rate hike expectations rising - aiding dollar topside (and gbp$ downside) - as Fed Funds Futures Opt Implied probs now trade at 19.5% for Sept, 20.8% Nov and 40% for Dec, up from yesterday at 18.8, 20 an 39.8 - the risk-on bias already started today will likely see these probabilities continue to strengthen through the end of the day.
Trading Strategy:
1. So from here after holding shorts at 1.3400 average, given this fresh and extreme impetus for downside - I will continue to hold my cable lower to the 1.285 target (unload 50%) and save 25-50% (depending if i unload 25% at the 1.305 level) for the Aug meeting itself where 1.25 is likely - where before today holding cable seemed more risky as the risks looked skewed to a hawkish BOE, which now has flipped. Unlikely, but any rallies to 1.33-35 level i will be reshorting - cable downside is a function of time imo.
- I like holding short because BOJ are likely to ease, whilst the FOMC stay neutral/ Hawkish, this in turn puts more pressure on the BOE to ease/ GBP - in order to prevent GBP appreciating vs JPY (disinflationairy) BOE must ease too & hawkish FED stance puts pressure on GBPUSD lower.
- Risks to the view continue to be if 1) New/ Weale/ Forbes continue to reiterate their hawkish/ no easing stance and perhaps less impactful; 2) Next weeks UK GDP reading - will not contain much Post brexit data so any upside is unlikely to give GBP strength, though downside is welcomed and could cause further selling (Low pre-Brexit GDP gives BOE more reason to cut)
GBP OIS PRICING A 94% CHANCE OF A 25BPS CUT FROM THE BOE IN AUGUST (85% PRE PMI)
- UK CHANCELLOR HAMMOND: Must restore uncertainty after July PMI
- UK CHANCELLOR HAMMOND: BOE will use monetary policy tools at its disposal
- UK CHANCELLOR HAMMOND: BOE have tools to respond to market turbulence in the short-term
BoAML ON BOE:
- We look for the BoE to cut rates 25bp and increase QE by £50bn in August, split between Gilts and private sector assets.
- BoE inaction so far and heightened policy uncertainty leaves risk-reward unattractive in the front end in our view.
- We prefer to position for potential BoE Gilt purchases, reiterating our 5s20s Gilt flattener as attractive in a QE-scenario.
JP MORGAN ON BOE:
- Current market pricing of a 25bps rate
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 1@1.34/335, sell 2@1.38/9 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
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
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*
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*
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.
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 CABLE: HISTORICAL GBPUSD v EURUSD CORRELATION CYCLESOn 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.
I also like short GU fundamentally over the next 4 weeks especially but also 12months for:
FOMC 16th June - hawkish or hike must push GU lower.
BREXIT 23rd june - UK Referendum uncertainty will inevitable price GU lower than 1.43 at somepoint before or on the 23rd, even if briefly - just like GU priced lower as Scottish Independce referendum loomed (which is less of a risk but equally as likely to happen)
Economic Divergence - Fundamentally the UK economy and financial markets are not as robust as the US due to a lack of innovation and a poor technology sector, which massively will affect productivity, the recovery and future growth (especially as moores law becomes questionable).
This economic divergence will be priced in as lower GU as investors in the long run price such economic differentials as speculation in future monetary policy divergence.
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
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!
