DislikedGBPUSD: Sold this morning -100k before the BOE data during liquidity search, as usual, crazy cable returned North. We have Governor Carney speaking soon, don't thing this gonna stay that high. {image} {image}Ignored
Didn't find time to post during the commodities sell off (too busy ). During high nervousness on SPX, Forex drivers are messy and don't follow usual dynamics. We should keep in mind that Forex is also used for hedging commercial sales. Purchasing and sales managers turn to Forex to hedge their foreign contracts during global market stress and their impact can be significant when market is thin (real money sitting on the sidelines).
GBP TRADE
GBPUSD:
We added -50K at 1.5128, we are now "short" -150k. Lock all at 1.5120
Why are we selling GU and not EU:
Both currencies are limited on the Upside because market is waiting for the FED liftoff. But we avoid the Euro because its too stretched on the downside and is prone to generating squeezes. These squeezes can be ignited by the growing idea that the FED tightening is going to be more limited in scope and pace because the commodities massive slump is going to modify FED projections in terms of inflation (monetary policy first leg being price stability).
This view is sound but it's not only the Fed who would reassess its views but all the central banks (zero sum game). More important is the divergence in the Economy and the US are doing rather well in terms of Growth/Employment (monetary policy second leg).
If we want to dig deeper, we could also add that inflation must be dealt with way in advance (tightening), while commodities impact on price is immediate. Therefore either the commodities slump is going to last and on a longer term it's good for the Economy (growth generator), or it's going to stabilize and its impact on price stability gonna be short lived. To make it short, the US are not the Eurozone and the FED is more concerned about inflation than deflation, whereas EZ has deflation fears.
We, as traders, we are interested in how market prices in all this, we don't seek to be wrong or right. We know that:
- Market is thin, because this is the End of Year and real money locking their portfolios are sit on the sidelines. Also many lost money when ECB under-delivered on DEc 3rd and they are not ready to be exposed again mainly on the Euro.
- FED tightening is questioned by some participants (see above) this can limit the Euro on the downside and the USD on the upside.
- Forex currently is Commercials and EoD techs driven, this can be either directionless or dangerous (daily gaps).
- Commodity currencies (AUD, CAD, NZD) are falling, hence amplifying distortions in inflows/outflows usual correlations.
- Market has not yet fully priced in the BOE projections.
From all this we don't have a clear direction because both sides are limited mainly on the EurUsd. That's why we prefer the GU we see reaching 1.4850. For that we use the FOMC next meeting catalyst which will slam the bullish Techs. Nevertheless as we said many times Cable is prone to nonsense, we should be cautious and also keep in mind EurGbp correlation can impact GU direction. We lock all above 1.5120.
Why locking so high?
Because we have already made tons of pips on GU, and in the current instability we want to give its chances to this position. We accepted more than 100 pips drawdown because the upside was limited and the Tech ping pong will lose stem when we approach the FOMC meeting. Techs impact is always limited in range, but one must know that the current dynamic is Tech driven.
By locking we will make few pips and let more than 150pips to the market if it reverses due to the thin liquidity, but if the FOMC is above expectations in term of tightening (actually it's what we think) we could probably reach 1.4600.