Article 50 was triggered last week and Sterling continued the March rally which started after the Bank of England’s March meeting indicated hawkish rhetoric from policy-makers followed by upbeat UK inflation and retail sales data and supported by Dollar weakness after and profit taking post the FOMC rate meeting last month and the failure for the Trump Administration to repeal and replace the Affordable Health Care Act.
With Brexit underway the UK and EU have a 2-year deadline to negotiate the exit agreement with June looking like the logical starting point for official negotiations due to the French election. As we know the market does not like uncertainty and while the exact details of the exit agreement still need to be hashed out the UK government published its position on Thursday in the Great Repeal Bill White Paper (‘Legistlating for the United Kingdom’s withdrawal from the European Union’) which is intended to give businesses, workers and investors as much certainty as possible by mitigating concern over sudden big changes to regulation over the next two years. The release of this bill resulted in Pound strength against all its counterparts. Also, recent data out of the UK has indicated that Brexit has not yet started showing a negative impact on the UK with the real reason behind the fall in Sterling due to a massive sell off and possible overreaction of the market getting out of Pound due to risk aversion.
Looking at COT data the market is net-short and short positions are at record levels. Should Pound move higher this could result in a short-squeeze that gets Bears taking profit or stops being taken out. Therefore, April may provide an opportunity for a Pound relief rally.
Historical data and seasonality shows that Pound strengthens during April and tops out at the start of May. This has been the case for the past 12 years. Perhaps it has something to do with UK fiscal running from 1 April to 31 March.
In terms of a trade I see opportunities to sell rallies on EURGBP due to the ECB recently confirming what every Euro Bear knew – policy will not be changed any time soon, rates are going to remain at current low levels and the asset buying program will continue until at least December.
Trading a strong pound against a weak Aussie makes sense. We have a RBA meeting coming up this week and the RBA is expected to keep rates on hold. The minutes of the March board meeting were less upbeat than previous meetings and the concern over risk in the housing market continues. The market is looking for any indication of the rate path beyond 2017 with some participants viewing low-inflation, on-going spare capacity in the labour market and weak wages growth as reason for the RBA to ease policy further in 2018.
GBPUSD long makes sense when USDollar is weak and would be a good trade if NFP is negative on Friday and we see an unwinding on the reflation trade. However, if NFP is positive and we see a rise in the US 10Y yield and the Yen strength in March was due partly to repatriation then GBPJPY would be a good buy due to pairing strong Pound with weak Yen. Should Yen be weak heading into NFP long GBPJPY would make sense.
According to eFXPlus, Morgan Stanley sees Sterling moving higher given the substantial GBP short position stating that marginally better news will push GBP higher. Morgan Stanley see an opportunity shorting GBPNZD due to NZD staying weak due to its sensitivity to global market volatility and New Zealand economic data. BofA Merrill Lynch sees Pound trading back to 1.20 with 1.20 presenting a buying opportunity. The only bank in an open trade on GBPUSD is Credit Suisse, who are short at 1.2538 with a target of 1.2110 and a stop at 1.2669.