Wednesday, 6 November 2013

Can We Still Buy the Pound and Sell the Euro?

Ralph Shell, Excel Analyst

On October 24th, we took a look at the EURGBP and suggested this might be a way to short the euro without getting involved with the USD. 

On that date, remember, the markets were trying to judge the impact of the government shutdown on the US economy, as well as the Feds guidance going forward.  At that time, the experts had decided the Fed would be cautious in the aftermath of the shutdown, and any tapering of the bond buying program would be delayed.

Again, and on that day, the EURGBP was trading in the .8505 to the .8555 level, and, during the previous four weeks, the euro had been out-performing the pound, moving up from .8330 to .8550.  Most of the rally was about the EU congratulating themselves on the end of the recession.

There was a problem with this assessment.  The economic numbers failed to confirm the recovery. 

On Friday the 25th of October it was reported the EU M3 Money Supply on a y/y basis had grown by only 2.1%, less the the 2.4% anticipated, and the 2.3% in the previous period.  The weak money growth indicated either banks were unwilling to lend, or the animal spirits of the entrepreneurs were subdued, thereby curtailing the demand for risk capital.  

Later the same day, the UK GDP was announced.  It was up 0.8 on a Q/Q basis and up 1.5% for the year.  The numbers were bearish the euro versus the pound, but that did not stop the euro rally as it moved on up to .8580.  The following week, when the EU unemployment rate moved up to 12.2%, and the EU PPI index showed signs of deflation, this proved too much for the euro versus either the pound or the USD.

Since there had been a big build up of euro longs versus a short USD, we would suspect more of the euro loss to the pound was really selling of the euro versus the USD last week. 

The strength of the pound this week would seem to be a different story. 

Monday, the UK PMI for Construction came in at 59.4, the highest in many years.  This was followed by a British PMI for Services, Tuesday, which came in at 62.5, the highest reading in sixteen years.

There are several obvious reasons why the high end of British real estate is in demand. 

The super rich in Russia, China and the oil rich sheiks are all seeking real estate in London.  In some cases they fear the future of freedom in their native country.  Others may fear capital controls that may hinder the movement of their stash in the future.  For still others, they are moving, like the wealthy French, to escape confiscatory income or inheritance tax.

Many of the new arrivals have cash and they are prepared to spend it.  The British have welcomed the emigrants who have run up the value of the prize London locations.  Some claim that London has become the capital of the world.  What are the chances there will be New Yorkers moving there once the new mayor de Blasio has his new taxes in place?

In addition to the foreign money coming into the real estate market, the government has a 'help to buy' scheme whereby the government aids in the origination of loans to help buy real estate.  With the help of this program UK average house prices hit an all time high of £247,000.  Naturally with new high prices, the real estate bulls are showing up, talking about doubling the price of London real estate in 5 to 7 years.  Sure, this is a bubble, but it looks like the ingredients are available to make the bubble grow.

Compare this to the dissatisfaction in the euro zone.  In The Telegraph it was reported:

"The plot is thickening fast in Italy. Romano Prodi – Mr. Euro himself – is calling for a Latin Front to rise up against Germany and force through a reflation policy before the whole experiment of monetary union spins out of control.

"France, Italy, and Spain should together pound their fists on the table, but they are not doing so because they delude themselves that they can go it alone," he told Quotidiano Nazionale".

Click to Enlarge EURGBP Daily Forex Chart
EURGBP Daily 05 November 2013, Excel Markets Analysis

The pound has made big gains Tuesday against the euro, selling close to .8391 - down almost 200 pips in the last five sessions. 

Click to Enlarge EURGBP Weekly Forex Chart
EURGBP Weekly 05 November 2013, Excel Markets Analysis

Still, there could be a further sell-off in front of us.  Selling this pair above the 84 handle, risking fifty or so pips might be a way to approach the pair.  The initial target should be around .8330.  Prior to year end, .8050 seems possible. 

As always, mind your money.
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