Sometimes I like to have absurd predictions.
I find that by looking at a long term chart, you can build a macro reasoning around a trade idea.
It doesn’t have to be right, but it has to have validity at least and you have to be open to changing your beliefs.
I think in the next few years, we will return to cheap holidays in the US, where £1 = $2.
Here’s a 6 month chart of cable.
Looks like a head is forming.
I’d argue that a mid term hold of 1.45 and you could hold GBP and keep adding to a very long term position.
This would put British firms who deal in USD in a tight position, since you’d really have to be hedging the dollar downside heavily, although that will be perfect for FX desks looking to make budget.
This could also be reliant on a Euro collapse.
I always note that fundamental moves have to be unwound, and you can see these in the charts.
Just like how the dollar move is currently being unwound (when the Fed stopped balance sheet increases, the dollar rallied through 2014), a failure of the Euro could mean that the EURGBP position is unwound – and that can also be seen in cable.
Take a look.
When I refer to Euro being introduced, I mean that in 2002, this is when it was introduced as legal tended to the initial 12 countries (banknotes and coins).
This has a vastly different usage to simply being currency, since it is now connected heavily to economic activity of consumers.
This is what has changed.
Back in 2002, no one knew what monetary union would bring (well, they did, but consumers and the EU didn’t).
They didn’t know that it would bring high amounts of unemployment, huge deficits, some nations benefiting more than others, countries requiring bailouts, 5% of loans in the Euro area being non performing, Deutsche Bank holding $75tn of gross exposure to derivatives and the ECB balance sheet being the highest in the world.
They didn’t expect cheap money being the only thing to be propping up large firms.
They didn’t expect a lot of these issues that have arisen.
Yet here we are with Draghi inflating the ECB balance sheet continually.
How is he going to unwind?
Well, he won’t be able to – not at the rates currently; who will be the buyer?
So he’s in a predicament.
This is the main reason as to why I do not think the Eurozone will last. There is inevitably going to be a liquidity crisis when it comes to wanting to get rid of these bonds.
Is China going to be the country to buy EZ bonds? Not with their epic debt issues.
I think confidence will be lost, gradually.
Even as recently as yesterday, the German ZEW Economic Survey had a huge miss, and EZ data hasn’t been fantastic this quarter.
The ECB, by trying to provide liquidity to the market, are actually creating a huge liquidity issue.
Back to the trade though.
The logic is pretty simple.
If we see the Eurozone start to fracture, accumulating longs above $1.45 would be a good idea. Even buy a Sterling ETF like FXB if you don’t want to be sitting managing it. See below:
I think a combination of high dollar funding costs, of which I referred to a few years ago here in relation to oil, Trump’s trade war with China and the Fed’s unwinding are going to keep the dollar suppressed for the foreseeable future.
On sterling side, I think Brexit is going to be a catalyst for growth.
With the service sector infrastructure we have, removing ourselves from EU regulations, especially in finance, should create a more competitive environment – everyone wants an FCA & PRU licence, very few care about being regulated by EU local regulatory bodies.
If the Euro were to go, it would mean that EU financial regulators would also go – because of the above reason, and London’s name as being the world’s biggest financial hub, I’d expect this to be hugely GBP bullish (no sarcastic comments about being a typical Leave voter, please).
There is no timeline for this, since that would mean I would have a crystal ball.
But any fracturing that is apparent will solidify this as a decent bet.