Sterling convexity call returns 25% in two months
Summary: Back in January, we made a few projections on sterling pairs like EURGBP, GBPUSD, GBPJPY and GBPAUD. Despite all of the Brexit volatility and the headline risk, we were correct, and the overnight levels in each of these pairs marked very significant two-month returns.
Let's take a look at the calls we made then, and measure them against the overnight levels in a few key currency pairs:
| January 21 close|
0.84725 (+4.37%, drawdown would have been -0.23%)
1.3381 (+4.03%, drawdown would have been -0.70%)
1.8853 (+5.08%, drawdown would have been -0.41%)
148.728 (+5.46%, drawdown would have been -0.29%)
Was there a lot of risk in the view? Well, January's consensus generally held that GBP was headed for the depths as Brexit tore the UK economy apart, so it was a pretty contrarian call.
• We would cover tactical longs in sterling baskets, as the potential base case we saw was for either a soft exit or some kind of delay. The issue now will be when will the next date is set – again, assuming that it still comes through, and bearing in mind the European parliamentary elections in May and potential changes in the UK's Parliament. What’s more interesting is, if/when we get an extension, a second referendum could fall within that timeframe.
• Obviously a longer extension before an actual decision just stretches our the UK's current headwinds phase. If you consider that Britain has been in the midst of Brexit uncertainty for over two years now, however, you must note that the UK economy has held up better than many expected. Confession time: I was among the tide of lemmings calling for a recession within six months of the Brexit vote!
• There are always opportunities, even if it means running against the crowd and risking a potential 5-8% drawdown. You control for that, of course, by allocating 25 to 100 bps of risk.
• One only needs a few +25% returns on capital trades to start having a real rock & roll year!
• I wish everyone a great close to the first quarter. We see a lot of potential opportunities over the next two weeks, including the short EURPLN divergence thesis between Poland and the Eurozone that we covered in our Macro Monday report published on March 4.
I have attached the two charts and a simple thesis on EURPLN shorts from that deck. I still think 4.25 from these 4.30 levels is very doable with a final 25% target at 4.20 and the balance below that. Note also that we flagged this divergence theme prior to the European Central Bank's hugely surprising dovish pivot. We would leave enough dry powder to double the position at 4.35; at 4.40, we’d have to go back to revisit the thesis and see if things have changed, and/or if our timing was just off.
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Energy crisis could turn energy stocks into secular winnerWith long-term expected returns for the global energy sector close to 10%, we look at 40 stocks that could be set to cash in.
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.