Would like to ask you on what is happening on GBP/USD – Thursday, 17 Oct 2013. Yesterday GBP/USD has an important news release of Retail Sales m/m at 08:30 GMT. Couple minutes before news release, USD was weakening through all fx majors and gold due to Chinese credit agency downgrading the US Credit Rating.
After news released, there was no market impact due to small deviation but with the benefit of hindsight, we can see that GBP/USD is close strongly higher. My question is how can we know that issue of credit downgrading will continue be continue the main theme of the day and rest of news is no longer important to market? Also, is that a way to determine from intraday perspective that at some point, price will exhaust and retrace down?
You are correct that there was very little impact since it was a small deviation. The USD got sold off across the board on the Chinese credit downgrade. But that was only half of the story. The market over the past 36 hours is playing the scenario that the Fed will interpret the economy as being weakened by the debt battle and that they will delay taper into next year, rather than Taper at the Oct or December meeting. That scenario caused the USD to sell off by 100-200 pips or so.
The GBP was the biggest beneficiary for a few reasons:
1. There was a string of decent data out of the UK this week, from some BoE members announcing that house prices are rising quickly, inflation at 2.7% slightly higher, lower claimant count, and slight higher retail sales. So that is decent fundamental story out of the UK. And if you remember a few weeks ago, the GBP/USD ran up nicely from 1.56 to 1.62 on combo of good UK data and USD weakness. So if that good UK data comes back and continues, the GBP can rise further. So the GBP/USD was a buy if it tripped downside stops below 1.5900 yesterday. The proper macro model was to buy the dips and tripping of the downside stops since the beginning of the week. After it runs up a few hundred pips, there is potential for the macro to be exhausted, so it is riskier to buy it.
2. And the second reason the GBP was bid was because on Wednesday, Oct 16, the GBP was acting poorly, for some unknown reasons, perhaps some EUR/GBP rising flows for a day. So today, that bearish GBP was reversed and the GBP got a boost because it was acting so poorly on Wed, Oct 16, that it snapped back and people betting on GBP weakness had to cover their shorts
3. Also, the BoE has not said anything bad about the strength of the GBP. They haven’t yet said that it is bad for the UK economy. While for the AUD and NZD, the higher those currencies go, the more the central banks may get worried that it is restraining growth.
So those reasons mentioned above are my explanation for why the market did what it did.
The market cares much more about whether the Fed will taper this year or delay it until next year, rather than a downgrade from a credit agency. I don’t really know what to do with EUR/USD or GBP/USD after they run up 100-200 pip in one day and blow through topside stops. I don’ want to buy because they can be overbought, especially the EUR/USD since they have low inflation and the ECB is going to stay low rates for extended period. I would favor buying the GBP over buying the EUR as a general rule.
The market started playing the dollar weakness theme and delayed Fed taper from Wednesday, Oct 16, slightly. Which I admit I was a bit slow to pick up on. It started in the bond market. The bonds surged higher even though the S&P was up and risk appetite was coming back. Which was weird because usually bonds should go down on risk appetite flows and removal of safe haven bid. But the market started to play the new scenario of the Fed delaying taper and some damage to the US economy slowing, so the bonds rallied.
Then that scenario continued today with bonds going higher (yields/interest rates going lower).
I took a look at the situation today and I was reluctant to buy EUR/USD or GBP/USD in the morning. In the end I saw that bonds were up and Crude oil was down and the USD was weaker, so I plugged that into my macro mind and decided that it would be a bullish combination for equities, and they were still consolidating in the morning and had not broken out, so I just bought some S&P futures to ride the upmove.
Whether the USD weakens going forward, will depend on how the Fed interprets the situation. If they taper in October (probably unlikely), then the USD can rally by like 300-500 pips. If they taper in December, the USD can rally by 100-300 pips. If they delay the taper until some times in 2014 and keep delaying it, then the USD can weaken further. I just have to admit that I can’t read the situation in EUR/USD or GBP/USD after they have run up 100-200 pips in a day, given the current information I have. Perhaps tomorrow, I will have some more information to work with that will change my mind. But currently I don’t know and my macro model tells me that EUR/USD and GBP/USD is overbought if its trips stops above daily highs, so I don’t want to buy it. But the proper macro model can change depending on the information flow and news released during the day.