Sunday, 25 May 2014

Dare We Sell the British Pound?

Ralph Shell, Excel Analyst

It was another week when the Forex Razor economic data calendar provided abundant information disclosing the status of the British economy.  Amongst the reports this week were the following; the UK CPI M/M up 0.4% better than the expected 0.3% and last periods 0.2%.  On a Y/Y basis, the numbers were up 1.8 versus 1.7% expected and the previous 1.6%. 

A subsequent report revealed the retail sales, excluding gas, which on a M/M basis was up 1.8%, expected up 0.5% and the previous period's plus 0.1%.  The Y/Y numbers were even more impressive - up 7.7% versus the expected up 5.4%, and the previous periods 4.9%.

Excel Markets May 2014 Forex Demo Trading ContestThe Q/Q GDP was a disappointment for the sterling bulls, up 0.8% versus 0.8% and 0.8%.  Still a Y/Y growth rate of 3.1% tops among the G7 members.  Trade in the GBPUSD (FXB, UUP, UDN) was down on Thursday, reflecting a report that Public Sector Borrowing was higher rather than the anticipated lower number. 

Still, for the week, the pound continues to trade higher.  For traders, especially those with a contrarian bent, the trend remains up and the pound continues to respond in an orderly fashion.

The bull run in the pound is not a newly-discovered trade.  The last COT report showed specs to be net long 54,671 contracts of combined futures and delta adjusted options.  The high was 69,970 contracts in the COT report of April 15th 2014.  Though there has been some profit-taking after the failed assault on the 1.70 handle, a sizable long remains.

The size of the open interest in the futures markets sometimes provides clues a bull run is mature.  The CME volume and open interest report from May 21st 2014 showed to total OI in the British pound futures to be 240K almost as big as the 269K in the euro on the same day.  The British population is only about 64M, far fewer than those who use the euro, but the futures trade in the pound is 89% of what is open in the euro.  Trading the pound has become quite popular.

Breakout in the GBPUSD began at the beginning of September 2013.  It was then the daily price, around the 1.55 handle, bolted through the 200-day SMA, and commenced the 1500 pip trek to the cusp of 1.70.  It should be noted the OI in the CME futures market was about 150K in early September 2013, 90K less than the current OI.

Over this timeframe the trend has clearly been higher with a pattern of higher highs and low.   There has been moments when the resolve of the bull has been tested.  The daily chart shows six or more instances where the lower level of the Bollinger Bands (20) have been approached or broken.

The bear case for selling the pound is mostly technical.  The OI is large, the specs are big longs, the market failed to conquer the 1.70 level, and trading at 1.6840 is getting ever closer to the advancing lower BB.  Still, we need more than just technicals if we are going to challenge this trend.

There is the possibility the currency markets and the pound in particular can be startled by the prospect of political change.  Friday 23rd May, was election day in Britain as well as election week across Europe for the European Parliament.  The Brits are quite angry with what they perceive as arrogant elites in Brussels who routinely tax and make expensive regulations without consultation.  The United Kingdom Independence Party (UKIP), as expected, gained votes at the expense of the coalition parties - London excepted.  The UKIP party wants to drop out of the EU.  Now.  The London financial district is opposed to leaving the EU, fearful they may lose business to the Continent.

Click to Enlarge GBPUSD Daily Currency Chart

On Monday, the EU Parliament will meet in Brussels for two days of meetings.  It is expected there will be an increase in the anti austerity and euro representatives.  Will this alter the policies of the Germans and their allies?  And if so would this not be friendly for sterling? 

It should be noted the euro has been losing to the pound.  Since February of 2013 the euro has depreciated from over .88 to under .81 pence. This illustrates the success of the Brits stimulus programs contrasted the failure of the German austerity formula.   Some of the recent losses in the euro are caused by anticipation of looser monetary policies on the Continent and the possibility of higher rates in Britain.

The relatively healthy business climate in Britain compared to the Continent has resulted in the migration of 201K from the EU to Britain in only the past year.  This compares to 158K in the previous year.  The Brits do not necessarily regard the unchecked migration over borders with in the EU as a good thing.  Many are poor and unskilled moving from Romania and Bulgaria.  As a result the UKIP vote will grow.

Energy policy is another major difference between Britain and the eurozone.  There are estimates of sizable deposits of both shale gas and oil in the UK.  Further, the UK politicians have the guts to confront the Green Party who prefer alternative energy which means they  remain dependent of Russia for energy needs.

A fundamental reason for selling the pound escapes me, so I think it is best to examine the longer-term charts.  Often, the short term charts contain too much random market noise.

Click to Enlarge GBPUSD Weekly Currency Chart

From the weekly chart we can see the GBPUSD broke above the 200-week SMA in September of 2013 - the weekly trend is powerful.  Only twice did the market back off to the 20 week average, and then quickly it rallied.  The chances are a return to the 1.6670 should be bought.  The trend is still in place. 

The monthly chart is even more interesting.  Sometime in 2015, it is possible the GBPUSD will trade as high as 1.85.  Buying breaks in the pound is still the way to play this market.

Click to Enlarge GBPUSD Monthly Currency Chart
Ralph Shell, Excel Analyst
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