Monday, 30 September 2013

Short GBP?

The UK macro picture has improved hugely in the past 6 months, forcing interest rate expectations up hugely as shown by the shift in 3M LIBOR expectations.

UK historical STIR curve from Jan vs real time and spread in red.
This view is supported by the very strong PMI readings and decent labour market readings, all in all the near 10% rally in the GBPUSD over the past 2.5 months has had a strong macro footing, However I see it unlikely to keep pace and there are starting to be signs from the Credit markets that this is the case.

GBP technical view, Citi Macro surprise middle pane, Stochastics bottom.
Here we can see that the GBP is running into 5 year resistance and strong supply above 1.62 through 1.6250 and this will definitely slow progress higher, this combined with overbought stochastics suggest upside is limited for now.

There was also very large volumes in GBP today (possible distribution top?)

Reuters Matching relative volume

This week we have important PMIs and I have a feeling that they'll disappoint, especially considering their strength of recent months that sort of momentum will be hard to keep.

Furthermore the aforementioned Credit view is seen here, the GBP vs (UK vs. US) yield curve spreads

GBP vs GBP model, large divergence occurring now

As we can see there is a lot of resistance for the GBP and the path of least resistance is lower - plus I don't mind holding long USD at this point, so that's why I'm in GBPUSD shorts as opposed to EURGBP longs.

Here is a quote from a Goldman Trader on today's Moves

"The most widely telegraphed flow of the year later this afternoon and no surprise cross trades softly - aided by the general risk off tone and political instability (although hardly new) in Italy over the weekend. My inclination tells me cross won't collapse from here and if anything we should be looking to reduce longs in sterling at these levels - cable should struggle to break 1.62 while EURGBP, although technically looking vulnerable below 0.8350 has severe snap back risk later today with month end also confusing the issue. We still like sterling but not at these levels and the easiest trade right now feels to observe and wait but risk reward here and now is to be short sterling tactically."

My trade is as follows - Short GBPUSD at market 1.6190. SL on a close above 1.63 with targets around 1.59

In other news.... BTPs had an exciting day lol

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