Trade Idea
- Signs of medium strength in GBP in the crosses
- PMI data alleviates some of the growth concerns in U.K economy
- As far as normalisation of monetary policy – the Bank of England is second only to the Fed in G10
It is no secret that we favour the US Dollar to outperform its G10 counterparts as the greenback benefits from divergent monetary policy, widening growth differentials and increasing investment flows. However, I believe there are opportunities in the crosses to diversify out of an overweight USD portfolio.
When comparing any other G10 currencies to the USD it is very difficult to make a case for anything other than USD strength in the medium term, but if we look a little deeper there is still a ranking system between the remaining currencies, and GBP is favourable when compared to the EUR and Japanese yen.
Last week’s Service PMI bounced back after a less than impressive 4th quarter of 2014, and this will go some way towards heading off GBP bears. U.K growth is still positive, and has the added benefit of falling unemployment and rising wage growth. These conditions are supportive of consumer spending which is beneficial to economic growth. All of which are generally good for a currency.
Risks to the Trade
- Of course not all is well for GBP as there are significant tailwinds, look no further than May’s general elections. Political uncertainty is high as currently there is no clear favourite, and we can’t forget the current account deficit that will come into focus as any incoming party will have to formulate a plan to tackle this issue, and fiscal consolidation seems the likeliest tactic.
- Furthermore, falling Crude Oil prices has helped inflationary pressures decline, which has effectively pushed back potential rate hikes by the BOE to Q4 2015.
What’s the Trade Idea?
The few positive points I’ve mentioned above are likely to give the GBP an edge over the likes of the EUR and JPY.
The Euro is at the mercy of the markets right now as the European Central Bank when above and beyond expectations at the latest rate announcement. The ECB has pledged to support the Eurozone with their own version of quantitative easing.
Mario Draghi has started with a 60bn Euro per month, open ended bond buying program set to being in March. That’s right, the same process the USD implemented 6 years ago is now starting in the Eurozone. QE is notoriously bad for the related currency. This makes the Euro a worthy candidate to sell.
Alternatively the Japanese Yen has all the same elements facing it as the Euro as the BOJ continue with their pre-existing monetary easing as they attempt to reach their inflation target. So JPY is set to underperform when compared to GBP.
Consider this. The easing of monetary policy by the ECB and BOJ (along with RBA and BOC) is aimed at stimulating global growth, which if successful will reduce investor’s demand for safe havens for capital. This means the JPY (favourite safe haven play) has the potential to come under pressure.
Timing of Entries
What I’ve talked about above are only trade ideas at the moment, nothing more. Remember, price has to analysed and considered. We want to know if the big money is in agreement with us. So, take the time to analyse the charts technically (FPP software, FPF system or any other method you may use) so you can best time your entry, and manage your risk.