Let's See if the GBP is Overpriced or Not:
We'll base it on interest rate differentials and what you'd be paying per basis point to capture the extra interest on 10 yr UK Gilt vs 10yr US T Bonds.
According to BB, the is a 38 basis point differential right now. The GBP is currently 2.039, so you're paying $2.04 to capture the 38 points. On a per point basis, that's around 5.4 cents/basis point.
Now I don't have the exact gilt and bond figures, but the the GBP hit 2.44 back in Nov 1981. UK interest rates were in the 17% area while the Fed rate was 15.85%. That's a 115 basis point difference and roughly 2 cents/basis point.
Costs a lot more to capture the difference now then it did back then. Note these are nominal figures, unadjusted for inflation.
Let's compare that to AUD rates. Right now, there's a 129 basis point advantage in 10yr Aud gov't notes compared to the equivilent US Treasury. I can buy AUD now for .8378-call it 84 cents. The cost per basis point is around 6/10ths of 1 penny-less then 1 cent/basis point to capture the difference. On the face of it, it seems like the better bargain.
From BB:
The pound rose as high as $2.0133 on April 18, the strongest since June 1981, as the fastest acceleration in U.K. inflation in a decade prompted investors to anticipate two more interest-rate increases from the Bank of England this year. Traders are also boosting bets the Federal Reserve will lower its target for overnight loans between banks, spurring demand for pounds.
IMO-these traders are wrong on 2 accounts. First, the BoE will not raise twice more. Why? Because they've said they won't, based on their own inflation projections. Be aware that they projected inflation to spike up-which it has-and then turn lower with rates going only to 5.5%. Second, the Fed will not lower interest rates this year. Why? They have an inflation bias, inflation has worsened so far this year, they've projected inflation to trend down later in the year and it will take months for it to trend down enough so that the Fed moves to even a neutral bias. Even at that point, growth will have to be anemic for them to lower the rate and by their own projection, growth looks to pick up by then.
While it's true that economists don't make good traders, it's also true that traders are not economists. What we're looking for is the time when the projections look to be correct AND traders start believing them. This is what happened back in November, when traders started to believe in what the Fed had been saying for several months, that inflation would trend lower (and therefore rates would not be going up). That info was worth about 900 pips.
So this doesn't mean to run out right now and short the GBP/USD pair. Traders are wrong and they may continue to be wrong for some time to come. There's alot of momentum against the $ so cable does figure to get stronger still. The BoE will be raising the rate to 5.5 at the next meeting.
The time to short the pound will come some time after the next UK inflation report IF inflation comes out lower AND we have further statements from the BoE that they continue with the same inflation projection as they had in Jan and Feb. Couple that with US data showing growth to be picking up and inflation trending down (if that happens) and a perfect chance to short the GBP will be set up.
When could all this be set up? Unknown right now, but i'll be following it closely. Fed and BoE projections figure things will play out like this in the second half of the year. I'm basing the future on what the economists at the BoE and Fed think, not on what traders think. I wouldn't venture even a guess on what the economy will do. Why should I, when I have the top economists in the world doing it for me?
Maybe we'll get lucky and the pound will look like 2.3 or 2.4 when it happens and it will be ready to return to a more normal 1.96-1.98 level.
If the projections of the best economists in the world are correct, a good chance to make some real pips will be there.
I have another thread in the News Trading Room if you're interested in reading about this and other things:
http://forexfactory.com/showthread.php?t=25943
We'll base it on interest rate differentials and what you'd be paying per basis point to capture the extra interest on 10 yr UK Gilt vs 10yr US T Bonds.
According to BB, the is a 38 basis point differential right now. The GBP is currently 2.039, so you're paying $2.04 to capture the 38 points. On a per point basis, that's around 5.4 cents/basis point.
Now I don't have the exact gilt and bond figures, but the the GBP hit 2.44 back in Nov 1981. UK interest rates were in the 17% area while the Fed rate was 15.85%. That's a 115 basis point difference and roughly 2 cents/basis point.
Costs a lot more to capture the difference now then it did back then. Note these are nominal figures, unadjusted for inflation.
Let's compare that to AUD rates. Right now, there's a 129 basis point advantage in 10yr Aud gov't notes compared to the equivilent US Treasury. I can buy AUD now for .8378-call it 84 cents. The cost per basis point is around 6/10ths of 1 penny-less then 1 cent/basis point to capture the difference. On the face of it, it seems like the better bargain.
From BB:
The pound rose as high as $2.0133 on April 18, the strongest since June 1981, as the fastest acceleration in U.K. inflation in a decade prompted investors to anticipate two more interest-rate increases from the Bank of England this year. Traders are also boosting bets the Federal Reserve will lower its target for overnight loans between banks, spurring demand for pounds.
IMO-these traders are wrong on 2 accounts. First, the BoE will not raise twice more. Why? Because they've said they won't, based on their own inflation projections. Be aware that they projected inflation to spike up-which it has-and then turn lower with rates going only to 5.5%. Second, the Fed will not lower interest rates this year. Why? They have an inflation bias, inflation has worsened so far this year, they've projected inflation to trend down later in the year and it will take months for it to trend down enough so that the Fed moves to even a neutral bias. Even at that point, growth will have to be anemic for them to lower the rate and by their own projection, growth looks to pick up by then.
While it's true that economists don't make good traders, it's also true that traders are not economists. What we're looking for is the time when the projections look to be correct AND traders start believing them. This is what happened back in November, when traders started to believe in what the Fed had been saying for several months, that inflation would trend lower (and therefore rates would not be going up). That info was worth about 900 pips.
So this doesn't mean to run out right now and short the GBP/USD pair. Traders are wrong and they may continue to be wrong for some time to come. There's alot of momentum against the $ so cable does figure to get stronger still. The BoE will be raising the rate to 5.5 at the next meeting.
The time to short the pound will come some time after the next UK inflation report IF inflation comes out lower AND we have further statements from the BoE that they continue with the same inflation projection as they had in Jan and Feb. Couple that with US data showing growth to be picking up and inflation trending down (if that happens) and a perfect chance to short the GBP will be set up.
When could all this be set up? Unknown right now, but i'll be following it closely. Fed and BoE projections figure things will play out like this in the second half of the year. I'm basing the future on what the economists at the BoE and Fed think, not on what traders think. I wouldn't venture even a guess on what the economy will do. Why should I, when I have the top economists in the world doing it for me?
Maybe we'll get lucky and the pound will look like 2.3 or 2.4 when it happens and it will be ready to return to a more normal 1.96-1.98 level.
If the projections of the best economists in the world are correct, a good chance to make some real pips will be there.
I have another thread in the News Trading Room if you're interested in reading about this and other things:
http://forexfactory.com/showthread.php?t=25943
