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March 11, 2013March 11, 2013

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.

Mark Carney could be handed powers to spur economy (The Telegraph)
That’s the 7th straight week futures traders have added to their GBPUSD shorts (StockTwits) [chart]
Draghi/King Boost EUR/GBP (City Index)
Blast From The Past As Cable Plunges To Seven Month Low (Zero Hedge)
Wall Street’s Brightest Minds Reveal The Charts That Worry Them Most (Business Insider) [charts on GBP and copper most interesting]
Knives out for George Osborne as report says austerity stunting growth (The Guardian)
Where next for the euro? (FT)

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March 3, 2013March 3, 2013

Sterling Digest, March 4 2013: more stimulus possible

Financial Times front page on September 17 1992 — Could history repeat?

As expected, sterling continued its descent and dropped to new lows last week as traders began to short GBP en masse. However, when much-lower-than-expected UK manufacturing PMI failed to produce a selloff on Friday, it became clear to me that perhaps sterling may be due for a bit of a correction. This week, traders are treated to rate decisions from the Reserve Bank of Australia, Bank of Japan, Bank of Canada, Bank of England and the European Central Bank. With poor economic data in the UK and the revelation of more MPC members in favor of additional monetary stimulus, the BoE could surprise the market with more accommodative policies. Any dovish announcement will see sterling break to new lows while a hold on policy could fuel a GBP corrective rally. It should be an interesting week.

Negative interest rates idea floated by Bank’s Paul Tucker (BBC)
Poor UK manufacturing survey adds to triple-dip recession fears (The Guardian)
Pound ‘is ugly but will rebound versus euro’ (The Telegraph)
The great euro stampede: Do we really need to rush? Britons are flocking to buy currency but fears of a plunging pound may prove wrong (DailyMail)
Why Pound Debasement Won’t Solve Industrial Malaise (Forex Live)
Sterling’s Italian job (FT)

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February 25, 2013February 25, 2013

Sterling Digest, February 25 2013: hardly at extreme levels

KAL Cartoon in The Economist — Put GBP on the roof and you illustrate current sterling sentiment in the market

Sterling weakness accelerated last week and culminated in the UK loosing its AAA credit rating on Friday. Now that monetary policy is dovish, economic activity nil, and credit rating downgraded, sterling has entered this new week of trading with a trifecta of negativity. And yet traders are hardly short GBP yet. In fact, I don’t think we will have reached extreme levels of short GBP trades until, $GBPUSD trades at 1.4750, $EURGBP at 0.8900, $GBPAUD trades below 1.4500, $GBPCAD below 1.5400, and $GBPNZD below 1.8000. Until price gets to those levels, expect corrections to be short-lived as the weak sterling trade gains momentum.

Fed and Bank of England head in different directions (FT)
GBP: WHAT MAKES UK AND US DOWNGRADES DIFFERENT (BK Asset Management)
Sterling Policy of Benign Neglect (City Index)
The real rate of British inflation (FT Alphaville)
UK Unemployment Data – Summary (Forex Live)
The Fed’s Minutes Scare the Market (Crossing Wall Street)
The UK must spend, lend and change to drive upturn in the economy (The Telegraph)
Cable vs. FTSE (City Index) [chart]
UK Inflation Watch: 10-Year Gilt Yield vs. GBP/USD and FTSE 250 (Distressed Volatility)

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February 20, 2013February 20, 2013

Cable Drops to Fresh Lows

And this is the zone (between 1.53 – 1.5230) everyone is watching.

We have failed 5 times in the past 3 years to break lower (below 1.5230). With COT data showing traders still very light sterling shorts and UK minutes being ultra-dovish, there is a very good chance $GBPUSD finally breaks through this support zone. If so, the major psychological level at 1.5000 becomes the new target for bears short term.

February 18, 2013February 18, 2013

The Other Side of The Euro Party

On Friday, I laid out price action that could suggest a weak euro in the short term. Today, Kathy Lien laid out the fundamentals that could shift market sentiment euro bearish.

… investors look to economic data and the European Commission’s forecasts for clues on whether the 5% decline in stocks and sharp contraction in Q4 GDP growth means that euro’s problems have returned.

The decline in Eurozone GDP growth in the fourth quarter raised concerns that the complete lack of growth last year and the prospect of a flat first quarter will make budget deficits in the region even more unsustainable.

Germany has been carrying the Eurozone on her shoulders and this week we learn whether she continues to do so vis a vis the IFO and PMI reports. If economic activity in Germany continues to surprise to the upside, the euro could find support but if there are any downside surprises, the currency could tumble quickly.

This week could be epic for euro or just a non-event. Either way, the holiday-shortened week has already been volatile and choppy for euro positions. The $EURGBP has already tested higher to 0.8650 as 0.8600 holds. So the euro is trying to keep the party going. Time will tell.

Read Kathy’s entire piece, Have the Euros Troubles Returned?

February 18, 2013

Sterling Digest, February 18 2013: serious shifting

New Design of UK Pound Sterling Coins, Flickr — GBP shifts bearish but not everyone agrees

One of the most interesting bits of news last week that went largely unnoticed was Ray Dalio’s positive take on sterling. Talk about a bold, bullish call in the face of new lows and poor fundamentals. While the week ended with sterling rallying on profit-taking, GBP pairs are still very bearish. $GBPUSD, in particular, is especially vulnerable as it finally shifts below the major 1.5500 level. The $EURGBP is the most bullish GBP pair but that comes at the whim of a weak euro. However, the market hasn’t quite made that weak euro shift yet. And the $GBPNZD has staged a breakout to the downside after 2 years of consolidation. With the BoE minutes and unemployment numbers the only UK releases this week and profit-taking already underway, watch for GBP pairs to shift back to their long-term bear trends or move higher still on more price correction.

Sterling strikes seven-month lows amid calls for further weakness (The Telegraph)
Bridgewater Bets on Stocks as Cash Moves Into Market (Bloomberg)
Ditch gilts and get out of sterling: Britain is heading for trouble (Money Week)
Futures Traders Cut Euro Longs In Weekly CFTC Data (Forex Live)
THE TOXIC STERLING BACKDROP (FXP PRO)
No one really understands what’s going on in our economy (The Telegraph)

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February 15, 2013

Is The Euro Party Over?

The $EURGBP wowed traders last month as it staged a rally not seen in several years. However, since then ECB officials have shown mild disdain for the strong euro. While the $EURGBP staged an impressive bounce off the 0.8440 lows, it failed to even make a new high above 0.8716.

And now the pair is staged to drop lower still. I’ve been watching and trading the $EURGBP long enough to know that when it breaches the 38.2% Fibonacci retracement level on any given timeframe, you can expect it to continue on to test the 50% Fibonacci level. On the daily chart, looking at the recent bullish wave, we see that price breached that 38.2% Fibonacci retracement level. The aforementioned failed high confirms price will continue lower to the 50% Fibonacci level at 0.8400.

From there, it will be interesting to see how the pair unfolds. The fundamentals have taken a less than rosy turn this week and future data could continue to support an economically faltering EU with little tolerance for the high exchange rate. Price below 0.84 could be the beginning of the end of the euro. Again. But, for now, this is only a correction. Only a daily close above 0.87 changes the impending bearish outlook.

February 14, 2013

A Kiwi Breakout

The $GBPNZD has officially broken out on the larger timeframes in Wednesday’s trading session. After breaking below the major psychological level of 1.85, the pair has extended losses from there to trade at 1.83 in early Asian trading. At the European open, those losses have extended further to 1.82.

Technically, the hold below 1.90, despite the spike highs, set the stage for a breakout to the downside in $GBPNZD. 1.90 marked the bottom of a consolidation range that held for well over 2 years. With the pair now below the 2011 lows, the pair is in uncharted territory trading at all-time lows.

To trade a pair that has no historical reference, it becomes prudent to either trade the psychological levels that tend to exist at the whole numbers and 50-pip intervals. Because the $GBPNZD moves in such wide swings, a trader can capitalize on moves from whole number to whole number with an eye on how price behaves at the 50 level. Another approach, is to remain on the sidelines as price falls and then enter trades on a correction. After the correction, the pair has left some historical support levels in place that a trader can now use as a guide when prices turn lower.

February 10, 2013February 11, 2013

Sterling Digest, February 11 2013: a fading rally

Kipper Williams cartoon, The Guardian — So Carney is not the UK’s savior?

GBP ended last week in consolidation as the technicals were helped in large part to the fundamentals when UK economic data surprised on the strong side and incoming B0E governor Carney surprised markets by steering clear of his dovish Davos comments on monetary policy. All this helped sterling rally last week to new highs across the board. This week holds a light economic calendar from the UK which may allow sterling to continue its consolidation rally. However, watch the current market sentiment to change on a whiff of bad news. With CPI, retail sales, and the BoE Inflation Report out this week, any of these news events has the potential to send sterling back on its long term bear trend.

Growth targets hit again as ‘big squeeze’ goes on (The Telegraph)
BoE warns on inflation as it reinvest QE proceeds (The Telegraph)[Read the full statement]
Central bankers centre-stage (Money Supply)
Bank of England governor-designate Carney draws battle lines but recognizes uphill struggle (Euro Money)
Fitch: UK Faces ‘Significant’ Risk of Downgrade (CNBC)
U.K. LESSON: AUSTERITY LEADS TO MORE DEBT (The New Yorker)

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February 7, 2013February 8, 2013

Is The Weak GBP Trade Crowded?

Sterling has spent most of the new year in the dog house. It has tumbled against every major currency with the exception of the Japanese yen. $GBPUSD, $GBPNZD, $GBPAUD have broken 2012 lows to reach new lows and are building breakouts to the downside.

Everyone is well aware of the poor fundamentals underlying the weak GBP story. Triple-dip recession looms. A dovish incoming central bank governor spouting his rhetoric before he even takes the helm. Unwinding of the “safe” haven flows that sterling enjoyed while the European Union was imploding. Traders piled in short GBP. Analysts made recommendations to sell sterling. However, even after hitting new lows this week, GBP bears have not been able to gain additional ground lower.

A crowded trade does not mean a change in sentiment. It is important to understand that the fundamentals definitely favor a weaker sterling. However, GBP has dropped considerably in just a month’s time without significant correction. Nothing moves in 1 direction forever. Profit-taking can be brutal in this environment as swing and position traders who caught the trend early become more cautious with these price stalls at lows. Also, perhaps more importantly, is that the fundamental landscape has become a bit more optimistic in just the past week. UK economic data has surprised on the stronger side. Carney sounded far less hawkish than he did a few weeks ago in his testimony today. While I still think GBP has further to fall in these highlighted currency pairs, it may be more prudent at these levels to wait on the more significant pullback before reloading the swing short sterling trade.