From the FXWW Chatroom: Our weekly trades will provide short term guidance on where we see 1-2 week opportunities in G10 FX markets. Unless we explicitly extend them, they will close out automatically at COB the second Friday after they are introduced.
Trade idea: Sell GBPUSD at 1.3080, target 1.28, stop loss 1.32
Our view:
· GBP looks acutely vulnerable to any further Fed-driven USD appreciation ahead of nonfarm payrolls on Friday. This comes down to the fact that the GBP squeeze on a narrower rate differentials, less bearish growth estimates and position squaring may have run its course. As support from these sources fade, underlying factors including the UK’s structural imbalances and a weak domestic outlook may exert more pull. This tilts risk-return in favor of shorts.
· In particular, we have concerns that the willingness to fund the current account deficit looks lower. Relative growth weighs on direct investment inflows. Higher FX volatility and lower yields reduce the appeal of unhedged debt portfolio inflows. M&A inflows have represented a counterbalance to these factors but are harder to judge as more than one-off flows.
· Positioning should now be more favorable to GBP losses since there has been some short covering among both hedge funds and real money investors recently. Our flow analysis shows buying from both of these sectors in recent weeks, so the likelihood is that positioning is more balanced than was the case in the immediate aftermath of the UK referendum. Investors may use rallies as an opportunity to rebuild shorts, capping gains.
· UK PMI data this week may pose asymmetric risks. Data flow in the UK has been strong relative to expectations with our Economic Surprise Index rising. This means that another strong reading would simply reinforce the recent trend, while weakness would come as a greater shock. It might foster the perception that pass through from the UK referendum to weaker conditions is beginning to pic
View the latest market information in the FXWW Chatroom with a free trial.