Sive Morten
Special Consultant to the FPA
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Fundamentals
Taking in consideration the exceptional importance of coming event, I mean Brexit voting on Tue, today we take a look at GBP, add some fundamental analysis and see what technical picture tells us.
Yesterday we've talked about major issues of coming voting in our report, dedicated to EUR. Here we add some details on coming event.
In the beginning I would like to share with my personal view. This is not the call for trading, guys. I just try to take in consideration some factors that stand on higher level and do not have direct relation to voting. I mean global political processes. Geopolitical situation shows the signs of gradual secession of US and EU in all spheres - politics, economy. UK is all-time US ally. Actually US historically initially was a UK colony. Although they have become different countries as ages passed, but the single core holds between them. Combining these two moments I would suggest that UK should stay with US as it always was.
Yes, I know that now it is least probable scenario that Brexit voting will pass through Parliament. But would bet on this result, because it is driving not by some undercover political squabbles in UK Parliament but by higher level political agreements. This is just my opinion, and I'm not pretending, of course, on the ultimate truth.
Now let's see what we have in mass media.
Reuters reports - as lawmakers gather in Britain’s parliament on Tuesday to vote on the future of the country’s relationship with Europe, traders in London’s financial hub will be bracing for a potential burst of market turmoil that could affect the Brexit process itself.
Sterling plunged more than 10 percent in the immediate aftermath of Britain’s shock vote to leave the European Union in June 2016, while $2 trillion was wiped off global stock markets.
This time, traders expect a more muted response. Prime Minister Theresa May is widely expected to fail in her attempt to win support for her Brexit plan, meaning the immediate market reaction could be limited - unless there is a surprise.
But as her failure would usher in yet more uncertainty over the Brexit process, big market swings may follow - and some commentators have suggested heavy market losses could even convince lawmakers to back May if she tried for a second vote.
“On the morning after the 2016 referendum result the London Stock Exchange kind of broke because there were such wide spreads on stocks, market makers weren’t finding prices,” said Laith Khalaf, senior analyst at Britain’s biggest direct investment service Hargreaves Lansdown. “We are less likely to see turmoil like that as people are ready for a range of outcomes this time, but we could see some big swings,” he said.
Either way, banks and brokerages will be prepared.
Barclays, Investec, JPMorgan and Nomura are among banks in London planning to draft in traders and analysts outside of normal business hours on Tuesday, sources familiar with the matter said, as they prepare for an influx of calls from investors keen to understand or make bets on the implications of the vote.
With the result not expected to become clear until around 1900 GMT, London’s stock exchange will be closed, meaning it will be sterling - traded 24 hours a day around the world - that will react first.
“We’re preparing for the big day and night by bringing sleeping bags into the office and have mini golf and pinball in our break out area, so we can keep the traders busy during any quieter hours,” said Samuel Leach, CEO of Samuel & Co. Trading.
Nomura has booked hotel rooms in the city, a bank spokesman said, for bleary-eyed traders to use if necessary after a night that could set the future for the 2.8 trillion pound ($3.6 trillion) British economy for generations.
“We are going to be glued to our trading screens or television wherever we are,” said Neil Jones, head of hedge fund foreign exchange sales at Mizuho, another Japanese bank, in London.
Across the world the same euphoria stands:
“If we see it becomes a true volatility event, then the ability to step away from the desk will be challenged. Of course, arrangements will be made to feed the troops and no doubt there will be a few ales after to unwind,” said Chris Weston, head of research at currency broker Pepperstone in Melbourne.
May’s compromise Brexit deal has dismayed both supporters of a more decisive break with the EU and those who want ties to remain as close as possible. Her reliance for a majority in parliament on a Northern Irish party that opposes the deal has made her position even more precarious.
Should she defy the odds, analysts say shares in sectors most directly exposed to the British economy such as banks, insurers, homebuilders and retailers could surge.
If May fails, however, it could send shockwaves through a financial industry that has been hoping Britain would move into a transitional deal with the EU until the end of 2020.
“This vote is a lightning-rod realization for some clients, that two years of ministerial resignations, chit-chat and speculation comes down to this: in three months we could be crashing out of Europe,” said Matthew Hudson, CEO of MJ Hudson which advises more than 600 institutional and retail investment firms.
Defeat for May could see asset managers immediately move to open offices in Europe to ensure continued access to EU markets in the absence of a deal with the bloc, Hudson said.
“I’ve got clients who are ready to push the button the minute she loses,” he said.
“Volatility is increasing,” said Ulrich Leuchtmann, an FX strategist at Commerzbank in Frankfurt.
“It seems the proposed deal is going to be rejected so delaying the vote could be an option for May,” he added.
The Times newspaper reported on Thursday that senior ministers were urging May to delay the vote for fear of a rout but her spokesman has said it would go ahead as planned.
A defeat on Tuesday could open up a series of different outcomes to Britain’s departure from the EU — each with its own impact on sterling — ranging from leaving without the deal to holding a second referendum on membership.
Most observers still expect some kind of deal to be reached eventually with polls forecasting the pound will firm to $1.29 in a month and $1.34 in six months.
Still, fears of a no-deal Brexit skewering Britain’s economy in less than four months’ time are reflected in heightened volatility and outright short positions held by hedge funds.
The growing chance of averting Brexit altogether — potentially via a second referendum — has led some investors to start pricing out the prospect of a damaging “no deal” departure from the EU, analysts say.
And now guys, let's take a look at CFTC report since the middle of September. Today we do not have fresh report, the last one that we have stands at the end of November, but, take a look how overall position has changed. Investors prepare to rally, guys. Speculators have closed ~50% of short position while keep longs intact. Hedgers have increased shorts for 40% - they take hedge against possible upside action. All this stuff happens on background of rising open interest.
This makes me think that chances on Brexit passing are not as bad as it is shown in news.
Within two months net short position on GBP has decreased 2 times:
Source: cftc.gov
Charting by Investing.com
Technicals
Monthly
Today guys it will be special report, dedicated to Brexit voting. Currently we're interested in what could happen depending on voting result. Nomura Securities suggest that price change could be around 6% as result of voting. Thus, upward target stands around 1.35, if vote will pass, while downside target stands around 1.20.
Generally speaking, with positive result we should get some AB-CD upside action, while negative scenario in fact triggers downside trend continuation. At the same time, guys we should understand that even positive voting and action to 1.35 or higher will not change UK fundamentals that stand poor. We could get AB-CD upside action on monthly chart, but this will be just postponing of downside continuation, as '222" sell pattern will be formed.
In fact, both scenarios suite to our bearish view, they just show different action inside the same long-term trend, which is too large. To break the major tendency here, GBP has to jump above 1.72 area.
If market will drop back to 1.20 lows, this could lead to further downside acceleration, stop grabbing below them, and gradual action to our 0.95 target which is monthly OP.
BoE hints on thus subject recently as well. "Britain risks suffering an even bigger hit to its economy than during the global financial crisis 10 years ago if it leaves the European Union in a worst-case Brexit scenario in four months’ time, the Bank of England said"
Weekly
We've talked about this picture couple of weeks ago, when some opinions on upside reversal have appeared, while we disagree with this. Both grabbers that were formed here have failed and market shows bearish pressure here, gravitating to 1.25 COP target.
But, at the same time, weekly butterfly is forming, which is bullish reversal pattern. It is difficult to suggest what precisely will happen on Tuesday, but it is possible that market could drop and complete 1.25 target on anticipation of "bad" result - voting failure. When "good" result will be released - price drastically turns up. Maybe some spikes will be here, just because of volatility on low liquidity market, this is also possible.
But, if you intend to trade this on a long side - 1.25 is the level that you should take in consideration.
Daily
Here we already see market nervousness by price action of recent week. A lot of "high waves" candles and no real direction. Reaction on our "222' Buy was minimal, just 3/8 retracement has happened and market continues downward action.
Now we also could point on some patterns - AB=CD and butterfly, more you could find on intraday charts. But what is really important here - daily oversold level. It stands precisely around 1.25 area. Thus, it is relatively clear what to do if you want to buy. But it is a bit more difficult with bearish position. Here, on daily we see just Overbought area and Fib level around 1.2950 area. If market gets there, by "pre-voting" volatility, this is something to watch for.
Intraday
Here is more patterns on intraday charts. First of all we have upside XOP, which stands in agreement with daily OB and Fib resistance and potentially it creates solid resistance area that might be useful for short entry for those who wants to take position on voting failure.
We also have here potential 3-Drive "Buy". But it has 1.26 destination point, while we suggest possible drop to 1.25 on weekly/daily basis. MACD divergence stands here as well. Currently it is difficult to suggest, how situation will develop, just keep in mind this pattern is well.
On 1H chart we mostly have channel. As you can see, intraday price action is too choppy and it is difficult to find something valuable there. Channel has too small range, definitely it should be broken as voting will take place. But, the direction of breakout is not necessary will coincide with final direction...
Conclusion:
Today we've made an attempt to prepare for coming Brexit voting and estimate potential levels that could be suitable for position taking. In general, whatever direction you intend to trade - it would be better to reduce position volume to minimum and place extended stop to avoid occasional wash out by market makers games. That should be good preparation for strong volatility.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
Taking in consideration the exceptional importance of coming event, I mean Brexit voting on Tue, today we take a look at GBP, add some fundamental analysis and see what technical picture tells us.
Yesterday we've talked about major issues of coming voting in our report, dedicated to EUR. Here we add some details on coming event.
In the beginning I would like to share with my personal view. This is not the call for trading, guys. I just try to take in consideration some factors that stand on higher level and do not have direct relation to voting. I mean global political processes. Geopolitical situation shows the signs of gradual secession of US and EU in all spheres - politics, economy. UK is all-time US ally. Actually US historically initially was a UK colony. Although they have become different countries as ages passed, but the single core holds between them. Combining these two moments I would suggest that UK should stay with US as it always was.
Yes, I know that now it is least probable scenario that Brexit voting will pass through Parliament. But would bet on this result, because it is driving not by some undercover political squabbles in UK Parliament but by higher level political agreements. This is just my opinion, and I'm not pretending, of course, on the ultimate truth.
Now let's see what we have in mass media.
Reuters reports - as lawmakers gather in Britain’s parliament on Tuesday to vote on the future of the country’s relationship with Europe, traders in London’s financial hub will be bracing for a potential burst of market turmoil that could affect the Brexit process itself.
Sterling plunged more than 10 percent in the immediate aftermath of Britain’s shock vote to leave the European Union in June 2016, while $2 trillion was wiped off global stock markets.
This time, traders expect a more muted response. Prime Minister Theresa May is widely expected to fail in her attempt to win support for her Brexit plan, meaning the immediate market reaction could be limited - unless there is a surprise.
But as her failure would usher in yet more uncertainty over the Brexit process, big market swings may follow - and some commentators have suggested heavy market losses could even convince lawmakers to back May if she tried for a second vote.
“On the morning after the 2016 referendum result the London Stock Exchange kind of broke because there were such wide spreads on stocks, market makers weren’t finding prices,” said Laith Khalaf, senior analyst at Britain’s biggest direct investment service Hargreaves Lansdown. “We are less likely to see turmoil like that as people are ready for a range of outcomes this time, but we could see some big swings,” he said.
Either way, banks and brokerages will be prepared.
Barclays, Investec, JPMorgan and Nomura are among banks in London planning to draft in traders and analysts outside of normal business hours on Tuesday, sources familiar with the matter said, as they prepare for an influx of calls from investors keen to understand or make bets on the implications of the vote.
With the result not expected to become clear until around 1900 GMT, London’s stock exchange will be closed, meaning it will be sterling - traded 24 hours a day around the world - that will react first.
“We’re preparing for the big day and night by bringing sleeping bags into the office and have mini golf and pinball in our break out area, so we can keep the traders busy during any quieter hours,” said Samuel Leach, CEO of Samuel & Co. Trading.
Nomura has booked hotel rooms in the city, a bank spokesman said, for bleary-eyed traders to use if necessary after a night that could set the future for the 2.8 trillion pound ($3.6 trillion) British economy for generations.
“We are going to be glued to our trading screens or television wherever we are,” said Neil Jones, head of hedge fund foreign exchange sales at Mizuho, another Japanese bank, in London.
Across the world the same euphoria stands:
“If we see it becomes a true volatility event, then the ability to step away from the desk will be challenged. Of course, arrangements will be made to feed the troops and no doubt there will be a few ales after to unwind,” said Chris Weston, head of research at currency broker Pepperstone in Melbourne.
May’s compromise Brexit deal has dismayed both supporters of a more decisive break with the EU and those who want ties to remain as close as possible. Her reliance for a majority in parliament on a Northern Irish party that opposes the deal has made her position even more precarious.
Should she defy the odds, analysts say shares in sectors most directly exposed to the British economy such as banks, insurers, homebuilders and retailers could surge.
If May fails, however, it could send shockwaves through a financial industry that has been hoping Britain would move into a transitional deal with the EU until the end of 2020.
“This vote is a lightning-rod realization for some clients, that two years of ministerial resignations, chit-chat and speculation comes down to this: in three months we could be crashing out of Europe,” said Matthew Hudson, CEO of MJ Hudson which advises more than 600 institutional and retail investment firms.
Defeat for May could see asset managers immediately move to open offices in Europe to ensure continued access to EU markets in the absence of a deal with the bloc, Hudson said.
“I’ve got clients who are ready to push the button the minute she loses,” he said.
“Volatility is increasing,” said Ulrich Leuchtmann, an FX strategist at Commerzbank in Frankfurt.
“It seems the proposed deal is going to be rejected so delaying the vote could be an option for May,” he added.
The Times newspaper reported on Thursday that senior ministers were urging May to delay the vote for fear of a rout but her spokesman has said it would go ahead as planned.
A defeat on Tuesday could open up a series of different outcomes to Britain’s departure from the EU — each with its own impact on sterling — ranging from leaving without the deal to holding a second referendum on membership.
Most observers still expect some kind of deal to be reached eventually with polls forecasting the pound will firm to $1.29 in a month and $1.34 in six months.
Still, fears of a no-deal Brexit skewering Britain’s economy in less than four months’ time are reflected in heightened volatility and outright short positions held by hedge funds.
The growing chance of averting Brexit altogether — potentially via a second referendum — has led some investors to start pricing out the prospect of a damaging “no deal” departure from the EU, analysts say.
And now guys, let's take a look at CFTC report since the middle of September. Today we do not have fresh report, the last one that we have stands at the end of November, but, take a look how overall position has changed. Investors prepare to rally, guys. Speculators have closed ~50% of short position while keep longs intact. Hedgers have increased shorts for 40% - they take hedge against possible upside action. All this stuff happens on background of rising open interest.
This makes me think that chances on Brexit passing are not as bad as it is shown in news.
Within two months net short position on GBP has decreased 2 times:
Source: cftc.gov
Charting by Investing.com
Technicals
Monthly
Today guys it will be special report, dedicated to Brexit voting. Currently we're interested in what could happen depending on voting result. Nomura Securities suggest that price change could be around 6% as result of voting. Thus, upward target stands around 1.35, if vote will pass, while downside target stands around 1.20.
Generally speaking, with positive result we should get some AB-CD upside action, while negative scenario in fact triggers downside trend continuation. At the same time, guys we should understand that even positive voting and action to 1.35 or higher will not change UK fundamentals that stand poor. We could get AB-CD upside action on monthly chart, but this will be just postponing of downside continuation, as '222" sell pattern will be formed.
In fact, both scenarios suite to our bearish view, they just show different action inside the same long-term trend, which is too large. To break the major tendency here, GBP has to jump above 1.72 area.
If market will drop back to 1.20 lows, this could lead to further downside acceleration, stop grabbing below them, and gradual action to our 0.95 target which is monthly OP.
BoE hints on thus subject recently as well. "Britain risks suffering an even bigger hit to its economy than during the global financial crisis 10 years ago if it leaves the European Union in a worst-case Brexit scenario in four months’ time, the Bank of England said"
Weekly
We've talked about this picture couple of weeks ago, when some opinions on upside reversal have appeared, while we disagree with this. Both grabbers that were formed here have failed and market shows bearish pressure here, gravitating to 1.25 COP target.
But, at the same time, weekly butterfly is forming, which is bullish reversal pattern. It is difficult to suggest what precisely will happen on Tuesday, but it is possible that market could drop and complete 1.25 target on anticipation of "bad" result - voting failure. When "good" result will be released - price drastically turns up. Maybe some spikes will be here, just because of volatility on low liquidity market, this is also possible.
But, if you intend to trade this on a long side - 1.25 is the level that you should take in consideration.
Daily
Here we already see market nervousness by price action of recent week. A lot of "high waves" candles and no real direction. Reaction on our "222' Buy was minimal, just 3/8 retracement has happened and market continues downward action.
Now we also could point on some patterns - AB=CD and butterfly, more you could find on intraday charts. But what is really important here - daily oversold level. It stands precisely around 1.25 area. Thus, it is relatively clear what to do if you want to buy. But it is a bit more difficult with bearish position. Here, on daily we see just Overbought area and Fib level around 1.2950 area. If market gets there, by "pre-voting" volatility, this is something to watch for.
Intraday
Here is more patterns on intraday charts. First of all we have upside XOP, which stands in agreement with daily OB and Fib resistance and potentially it creates solid resistance area that might be useful for short entry for those who wants to take position on voting failure.
We also have here potential 3-Drive "Buy". But it has 1.26 destination point, while we suggest possible drop to 1.25 on weekly/daily basis. MACD divergence stands here as well. Currently it is difficult to suggest, how situation will develop, just keep in mind this pattern is well.
On 1H chart we mostly have channel. As you can see, intraday price action is too choppy and it is difficult to find something valuable there. Channel has too small range, definitely it should be broken as voting will take place. But, the direction of breakout is not necessary will coincide with final direction...
Conclusion:
Today we've made an attempt to prepare for coming Brexit voting and estimate potential levels that could be suitable for position taking. In general, whatever direction you intend to trade - it would be better to reduce position volume to minimum and place extended stop to avoid occasional wash out by market makers games. That should be good preparation for strong volatility.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.