These 2 Longs Look Favorable
It was
a week that dollar bears relished as oversold simply became more
oversold. The charts at weeks end demonstrated just how far currencies can move
despite rhetoric and forecasts that we had simply moved too far too fast. While
we are hesitant to play the likes of the EUR or CHF on the long side based on
the daily chart, we will look to play them on an intra-day basis. However, we
do favor a long in GBP/USD as a longer-term play based not only on the chart,
but also some favorable macro/seasonal factors as described below.
For now, we have two open
trades, short NZD/JPY and short EUR/CHF. We also are waiting to place a long on
EUR/CAD at 1.5675 when that price is traded.
GBP/USD:
With the dollar weakness, due
mainly to concerns over the twin deficits, currencies like EUR, AUD, CHF and GBP
have been prime beneficiaries. However, a closer look at GBP reveals some
interesting findings that will have implications going into early 2005, but bode
well for the pair in December.Â
A recent research note from
Royal Bank of Scotland highlighted the seasonals of the GBP/USD, the findings
suggest that last weeks technical break higher, will likely have some good
follow through into December. However, when the seasonality in January is
viewed against what is a deteriorating macro backdrop, we see some compelling
reason to be bearish on the GBP, not versus the dollar per se (picking the least
ugly is not a winning strategy) but against the crosses, specifically the EUR
via EUR/GBP.
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Looking ahead and using
historical data to determine price movement,
“we see that between
2002 and 2004, the rise in cable essentially mirrored the widening of yield
spreads between the UK and US. However, since March this year, 1 year yield
spreads between
the UK and US have narrowed sharply, and the
correlation with cable has broken down. But over the longer run, there is a
tendency for yield spreads in cable to lead the currency rather than be
contemporaneously correlated. This suggests that even though cable may remain
strong through December, there is scope for narrowing yield spreads to lead to a
weaker pound in the early part of next year.â€
Source:Â Royal Bank of Scotland
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In addition, Britain too is
running very high twin deficits, and with yield spreads contracting, of which
was rather supportive to cable over the last year, we see both the dollar and
cable less attractive relative to currencies that are running surpluses
(Canada).Â
For now, we see long
positions in GBP/USD as being favorable but will monitor the price action going
forward, especially in EUR/GBP, as a way to participate in what appears to be a
more challenging year for cable in 2005.