Election Times

I remember the price action during the Scottish referendum. $GBPUSD moved over 500 pips on the announcement of the its official results. So I find this chart from Financial News to be incredible:

BlackRock took a snapshot of this adjusted sterling volatility measure at the start of this week, and compared that to snapshots taken 37 days before the 2010, 2005 and 2001 UK general elections, and last year’s Scottish Independence referendum.

The result is the chart above. What it shows is that the currency markets, at least, are the most nervous they’ve ever been ahead of a UK general election.

What kind of volatility comes with a market that is the most nervous it has ever been?! It’s a terrifying thought but apparently not for investors.

…BlackRock’s analysts observe that while implied sterling volatility has spiked in the currency markets, other areas of the financial world currently appear almost complacent about the UK election. Credit default swap spreads, for example, which capture the price of insuring against the risk of a UK government debt default, have remained stable, and the gilt market “has priced in little fiscal risk premium since the 2010 election”.

It concludes: “Could markets be too complacent? We think so. We do not see the election posing long-lasting credit risk to owners of UK sovereign debt – but we do brace for volatility in the short term.”

In a world of easy money and you are one of 2 reigning money in, perhaps it is as simple as supply and demand. Money flows to high quality yield. Demand for GBP-denominated assets could buoy GBP even if markets are the most nervous they have ever been about a British general election. For long-term investors, this is noise. The trends are clear for the GBP. For day traders, this volatility will be a fool’s paradise. Either way, it is opportunity.

The only way to come out of the volatility unscathed and capitalize on the opportunity is to have a plan and trade your plan. Know what’s coming and ride the waves soundly.

Source: Markets’ pre-election nerves run high (Financial News)

Sterling Digest, March 11 2013: the charts that worry

Various denominations of GBP in regular visible light
Price doesn’t look this pretty

Sterling did produce a correction rally last week as $GBPUSD made a high at 1.5200, $GBPAUD as high as 1.4850; $GBPNZD as high as 1.8350; $GBPCAD as high as 1.5650; and $EURGBP as low as 0.8590. These rallies, for the most part, kept GBP below previous long term lows. This technical development was certainly the case for the $GBPUSD, $EURGBP, and $GBPNZD where all pairs have broken long term support levels. While the BoE did not move on additional QE, the surprising development of the week was the BoE’s possible change to a dual mandate to combat both inflation and unemployment. With this new trading week very light out of the UK, expect sterling price to continue to weaken across the board. While US news and the RBNZ rate decision will influence those respective currency pairs, the protocol with sterling is clearly to sell the rallies.

Image credit

Is There Something to Month End Flows

During the last days of February last week, sterling strengthened across the board. I noticed it because it was very strange to see the $GBPUSD and the $GBPAUD rise together when these GBP pairs usually diverge. $GBPUSD and $AUDUSD typically rise together on risk and a weak USD resulting in a weak $GBPAUD. Looking at the rest of the GBP pairs, sterling was being bought versus all the major currencies. As companies and investors alike exit positions and/or repatriate profits, capital flows can be even more exaggerated at the end of the month. And it seems investors are positioning with sterling.

But why would sterling go up when the United Kingdom is the only G10 country to fall into recession at the end of last year. The BoE has launched QE3 for the UK. Inflation is quite high even if the central bank chooses to ignore it until it comes back down to acceptable levels. An interesting monetary policy angle that is but that’s for another musing.

So why would sterling go up? Because of China? In yesterday’s digest, a very interesting article suggested that sterling is catching bid as a preferred funding currency to unwind long AUD positions. With China’s economy slowing down, analysts believe that Australia’s economy will suffer due to the declining demand from their large trading partner. A slowdown in the economy the main reason why the Reserve Bank of Australia is signaling a more dovish monetary policy. WSJ‘s Kemble-Diaz argues that the undervalued GBP has more value than other major currencies at such low levels.

Another reason may be seasonality.

seasonality in GBPUSD daily chart
March was a good time of year last year

In $GBPUSD this time last year, March 2011 marked the beginning of a push higher after the rally in January 2011. Cable is certainly well-posied for consolidation after its monster rally higher earlier this year. Another push higher is supported technically as long as price remains above 1.55.

Since seasonality is the buzzword on the financial circuit so far this year, let’s take it a little further. The end of the month into the beginning of the next tends to be a good time for cable. The $GBPUSD has rallied higher in the last months during this time period.

 

seasonality in GBPUSD 8 hour chart
The end/beginning of the month is a good time for cable

 

No matter how you reason it, sterling continues to confound the bears with its strength. Against the USD, maybe $GBPUSD becomes an easy buy. But when supported with a rise in $GBPCAD, $GBPAUD, and $GBPNZD, one need only concentrates on riding this new trend while the opportunity is here and getting off where appropriate. Trade what you see.