UPDATE (1) – Looks like somebody forgot to give the pound the script that it was supposed to crash today… See the 2 day chart below. Looks like the “anal”ysts have got it wrong. Again..!! Perhaps it pays to read a truly independent, unbiased, sometimes controversial publication run by proper traders and not blithe journo’s with no real world experience that look for the glib headline?
The scare stories in the press this weekend (prime example above) following the largely symbolic downgrade by Moody’s of the UK’s AAA rating has got my nose twitching once again…
I don’t know how many of our readers realise this, but there’s a saying in trading – “When it’s headline news it’s over” – which basically means that if the press is all over a story then the move’s done. Think back to each of the stock market routs of recent years and the appearance of the story on News at Ten – on each and every occassion a sharp bounce has followed pretty much immediately. You can actually trade this and make money out of it almost without fail – I certainly have!
The press are running stories this weekend about how to benefit from the coming sterling rout and some numbnut (sorry “anal”yst!) from Shore Capital is even talking of GBPUSD at $1.35 and parity with the Euro by the end of year. Didn’t we hear all that before at the beginning of 2010? Next stop was a 25% appreciation of sterling against the Euro…
Similarly, stories about the rebalancing of the economy being required, with a consequent depreciation in the pound, are akin to the Shares Mag Avocet Mining faux pas! Excuse me? The pound is the worst performing currency thus far this year as you can see in the table below and is still dramatically lower (around 20%) on a trade weighted basis than it was before the onset of the GFC in 2008. That is one of the largest depreciations on record.
In other words, it HAS already depreciated, and some as any skier this year in the Alps will pay testimony too! Do you think the authorities want a real rout too where sterling goes into free fall and pumps inflation up with no real attendant flow through in trade benefits to our economy given the relatively low export basis of goods? I highly doubt it, and if they do, then they “Merv the swerve” King should be strung up for treason and economic crimes as it would decimate the consumer even more than they already have been!
I present 3 charts below to consider for anyone thinking of jumping on the “sell the pound” bandwagon this weekend.
1. The pound is unarguably excessively oversold and ripe for a rebound as the chart below portrays so acutely. Rebounds of course occur when everyone is positioned the opposite way – that is of course, precisely what creates the rebound. The selling of the pound this last week and so far this year has been in part in the expectation that the UK would be downgraded. Well, remember the saying – “buy the rumour sell the fact” or in this case – “sell the rumour, buy the fact”!
2. Here’s the latest COT (Commitment of Traders) analysis. We can see a sharp jump in pound shorts in the last week. To me this says that the bear is now well and truly “in” and at some point they will have to cover. The net short is now second only to the Yen and in fact the figure of 23k contracts is out near the peaks of the last few years – peaks that have coincided pretty much exactly with bottoms for the pound. Re the Yen – has anyone noticed in recent weeks how it has stopped falling too? It has stopped falling quite simply beacuse the trade is now crowded.
3. Below is a table showing the relative PPP measures of the major currencies. If that’s showing the pound as an overvalued currency that needs to depreciate then I need a pair of glasses. The real trades in my opinion are actually going long sterling against the AUD and Norwegian Krone and Swiss Franc, particularly if there is a knee jerk reaction lower next week. A reaction that we think will be very short lived.
Finally, remember how the big money is made in the market – it is made through knowing at what moment it is right to take the contrarian trade.
Why would anyone worth their trading boots sell a currency that has (a) had the event they were waiting for to knock it just occur, (b) is heavily oversold, (c) the market is already positioned extensively short and (d) is fundamentally undervalued?
Good luck to anyone jumping on that bandwagon – I personally fancy the tyre treads are now almost bare on that particular wagon…
We are buying the pound heavily at these levels. Click the image below for a FREE ebook on trading currencies.