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Latest Macro Monday For WK 43 - Does brexit deal = top of USD strength?
Happy Macro Tue 22 Oct 2019
APAC Global Macro Morning Brief – Sensational Sterling...
The sensational sterling ascent seems to know no bounds... with GBPUSD 1.2963 this Asia Tue Morning, after getting to 1.3013 o/n... just last month this puppy made a low of 1.1959
That’s a +8.4% unlevered... assuming +5x to 10x leverage which is conservative for FX... that’s +42% to 84% in a little over a month... +42% to +84% on a $10m exposure can buy a few drinks around the bar… on a $50m to $100m exposure… one can buy a few bars & lounges... perhaps even a little boutique resort
Again take away here - whether you find it or not, there are always profitable opportunities out there. The likely direction of overall USD strength will be dictated by whether we get a deal & exit (likely USD bearish) or we an extension (likely USD bullish)
The price action on sterling crosses is obviously telling us the market believes the probability of a deal is high. The tactical skew (near-term) from these c. 1.29/1.30 lvls is likely 1.2500 / 1.2400 on an initial moves if we fail & upward of 1.3500 to 1.4000 on an extension to exit scenario
Our options desk point out that it should be noted that the day-to-day volatility on sterling fluctuates extensively, currently on cable is around the 130bp to 135bp, implying a range of c. 1.2795 / 1.3132 – which in KVP’s view is deceptive given what should be a binary move once we are clear on outcome
The structural skew (longer-term) on the other hand is massively asymmetrical to sterling strength imho, check out the quarterly charts we used on this wks’ Macro Monday – from multi-decades perspective, sterling & its respective assets are still very much under owned
Obviously the flipside of looking at sterling & sterling related assets on a longer time horizon is we still have credit impulse that is negative flagged by colleague Dembik, plus Jakobsen points out that the UK is almost certainly heading into a recession which has tended to see a weaker GBP
Cross-Asset wise o/n was a session that saw us getting back over 3,000 on the S&P 500 +0.69% to 3007, yields continued to rise with US 10s at c. 1.80%, which was also reflected in pullbacks in Gold 1491 -0.37%. Silver 17.56 +0.05% on the other hand was pretty much unchanged unlike the -0.77% in Brent 59.20
The Dollar o/n was predominantly mixed, with small gains on the likes of EUR, JPY & GBP, yet losing vs. the likes of the Kiwi 0.6408 & loonie 1.3089 gaining in strength by +0.41% & +0.30%. The results of the Canadian elections, which are due within the next 24 hours, could have a big impact on loonie direction
For further thoughts on Currencies & John on GBP check out - FX Update: GBP shrugs off Brexit stumble, key week for USD. Our equity strategist Peter Garnry on Q3 Earnings & Amazon in particular, as well as overall comment on equity valuations
- UK: Public Sector Net Borrowing, CBI Industrial Order Expectations
- CA: Retails Sales, Canadian Federal Elections Results Should Come Through, BoC Business Outlook Survey
- US: Existing Home Sales, Richmond Mfg. Index