Yesterdays GBP action and Skeleton GBP Update: Nov 4th, 2010

" FIN. MIN. NODA: Wont tolerate excessive currency moves, ready to take bold action. "

Tweeted Coverage of Japan's finance minster. I can't help but chuckle every time I see the Japanese keep on barking with no bite (I believe this to be the 3rd or 4th time he has stated something similar). Don't get me wrong, they may bite soon and bite hard, but they keep loosing face and credibility the more they bark and more biting will certainly aggravate their situation... unless they bite hard enough!

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Morning Update:

For the LAST WEEK of October, I was proclaiming short dollar strength and long term dollar weakness. I will have to say for all the majors the last weak of October (except the Pound), experienced range bound dollar strength. I had expected more of a trended correction, but at least I was semi correct...

Going into this week we (AC) definitely have benefited from sticking to our fundamental and technical view of the pound despite our overall short-term bull thesis on the dollar. The firmness in the pound with its fundamental divergence from the strong dollar last week was a good confirmation for our positioning on the pair for this week.

Another good call would be the NZD, bullish from 76 to 80, the technical landscape and regional benefits and lagged performance all leads to an undervalued pair for the NZD/USD. Unfortunately we had our resources focused energy and indices research. Though, on the risk side, its probably better that we took no action as we understand the structural nature of the pair relative to its peers with more continued ongoing resources.

This week I will have to call a foul call on expecting a trended dollar strength for this week. I was wrong in thinking we would see a bigger correction on the dollar. My thinking now, is that the dollar correction happened, but in a sideways formation, the range trading extended the major pairs enough to allow continued prolonged trend upside strength (the very volatile narrowing range environment starting from about three weeks ago). At least this wrong view, hasn't affected short term performance.

The EUR and GBP vs USD has now broken out of its ranges to the upside. QE2 has been the big driver and yesterday's 600 Billion announcement helped fuel the fire. Though, I will argue that the pound's move was more fundamental (not too much QE2 driven), as pre-FOMC announcement, the pound broke strong above its 1.60 resistance on PMI data. Going into the FOMC announcement, traders were pricing the news in as it took back all the daily gains. Upon the announcement we saw a 130 pip range, but only a 30 pip candle body on the hour, and then Asia brought it back up to yesterday Daily highs. With todays London open we are seeing strong buying power going into the BOE announcement.

Since I know I just barfed up a bunch of data I will summarize for clarity.

1. True move: Yesterday's morning London trading; fundamentals pop above strong 1.60 resistance,from UK PMI along with past days of strong econ data, indicative of the true trend.
2. Post PMI announcement strong sell off pre-announcement = the announcement was discounted.
3. Strong 1.605 support holds (around previous high seen in mid OCT).
4. During FOMC annoucment BIG noise as seen by large range. We know this is noise as the open close spread is small (30 pip hourly candle body).
5. Overnight Asian trading traded it back to the previous day highs = canceling any discounted FOMC news and noise
6. Big break out above yesterdays highs with Todays London open = continuation of fundamental trend (Currently reaching 1.61864 on the 4:00am hour EST)

I will also have to state that the UK GDP surprise is encouraging for the Feds to have a soft QE program continuation or have more arguments to start exiting all together. Additionally, Exiting the program would be inline with the political austerity measures in place.

However, the risk of UK QE still remains as TRUE underlying fundamentals such as weak housing, deflation risks, and questionable sustained long term growth remains. At least for today, QE expansion may be avoided, but may be noted the program will still be in place as a cautionary measure.

In terms of UK QE the strong GBP may take a blow from the noise and news coming in, but ideally not strong enough to break below strong 1.60 support levels, especially with todays early morning gains.


Take Away (a.k.a. what I am held accountable for):

From here out will see continued dollar weakness with lots of noise.

• Target high 1.63 on the GBP
  
• Target 80 on the NZD
  
• Dollar weakness continuing with interim dollar strength noise.
  

Market Correlations:

I expect front month WTI to trade on the high side of its range of 86.

Unfortunately, this may mean I maybe wrong if the weak dollar/Strong equity correlation is strong. So far the SPX 1200 level has held and I expect noise possible up to 1210 - 1215. Beyond that point I will have to say I am wrong on the bearish SPX view.


**on a side note: the EUR/USD is finally trading in the 1.42 region. Amazing how volatile that pair is. The NZD is about to break its pre crisis highs like the AUD has been, if dollar strength continues into next weak!

-A. Lê