Etikett: GBP/USD

Poised for further weakness?

USD Poised for further weakness? ETF SecuritiesPoised for further weakness?

ETF Securities Weekly Investment Insights USD Poised for further weakness?

Trade idea – LUSB LN & SUSB LN

Highlights

  • USD has fallen against its major currency counterparts as the US Federal Reserve (Fed) projections fell short of hawkish expectations.
  • The EUR/USD and GBP/USD are trading at the top of their respective ranges established after Trump’s election.
  • Further upside would require a significant catalyst, which could come in the form of a failed attempt to pass healthcare reform in US House of Representatives. In this scenario the GBP has potential to gain as shorts remain considerably elevated.
  • Otherwise, these pairs could retrace recent gains as the probability of rate hikes later in the year appear largely underpriced according to Federal Fund futures.

Last week, the failure of the Fed to raise its prospective interest rate trajectory put pressure on the US Dollar. The trade weighted value of the currency has fallen almost 2% in recent days tracing a 20 basis point (bp) drop in 10 year nominal US treasury yields. Despite raising the benchmark Federal funds rate by 25 bps as expected, the Federal Open Market Committee (FOMC) kept its December projections for the benchmark rate virtually intact, defying market expectations of a more aggressive tightening plan.

US Dollar weakness has coincided with positive news for the Euro and Sterling sending both pairs higher. Moderating rate hike expectations surfaced as Emmanuel Macron delivered strong performances in the first series of live presidential debates and the UK released healthy retail sales data. The confluence of factors has prompted both pairs to break through both their respective 50 and 100 day moving averages but remain at the top of recent ranges.

From a technical standpoint, the EUR/USD and GBP/USD have both reached key resistance points that have emerged following the Trump election. Traditional momentum indicators have yet to signal that either pair is overbought but are approaching such levels. A move higher above these levels would likely trigger buying but would require a significant catalyst.

One such catalyst could emerge from the contentious vote on a healthcare reform bill that is scheduled to be held in the House of Representatives today (having been postponed from yesterday) and acts as a precursor to Trump’s ability to pass his sweeping fiscal reform program. Should Trump fail then the US Dollar could come under pressure as optimistic growth and tightening expectations are curbed. In the alternative case where the bill is passed, then prospects for the US Dollar would be more positive. The market is currently pricing in a probability of a June rate hike at 54%, which could rise in coming months and allow the currency to retrace recent losses.

In terms of speculative positioning, shorts against the US Dollar are 70% below their five year average while longs have been trimmed to more reasonable levels. Meanwhile, Euro longs are at record highs and GBP shorts at record lows. In this respect, any further weakness in the US Dollar could be best expressed through GBP. Poised for further weakness?

Important Information

This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).

This communication is only targeted at qualified or professional investors.

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value. This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States. This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction.  No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek

Sterling oversold?

Sterling oversold?

Trade Idea – Foreign Exchange – Sterling oversold?

Highlights

  • Sterling crashed overnight as a combination of heavy selling and limited liquidity sent the currency spiralling. Sterling oversold?
  • Markets are pricing in a “hard” Brexit scenario and an overly pessimistic economic outlook for the UK.
  • Current levels are attractive for UK investors to hedge FX risk and lock in recent gains on international allocations.

Threat of “hard” Brexit pressures GBP

Sterling has had its worst week since the referendum, turning sharply lower and experiencing an overnight “flash crash” as markets digested Theresa May’s speech last Sunday, which offered up some valuable details of the “Government’s plan for Brexit”. The speech, delivered to the annual Conservative Party conference, outlined what many have interpreted as the first steps towards a “hard” Brexit, whereby the UK removes itself from the single market. In response, Sterling has plunged to 31- year lows and was even struck by a bout of sharp selling upon the Asian open this morning, pushing it temporarily to as low as the 1.18 level (see GBP takes a mysterious pounding). The sharp decline appears to be largely speculative in nature and in our opinion has little grounding in fundamentals. As such, we see current levels as an attractive longer term opportunity to short the Sterling via the GBP/USD and EUR/GBP and a favourable level for UK investors to hedge foreign currency risk.

Iterative process

In our opinion, May’s speech was less a direct indication of a “hard” Brexit but rather a description of the first steps in a largely iterative process that will form the basis of Brexit proceedings. May made it clear that once EU law is transposed into British legislation any changes and amendments would be subject to “full scrutiny and proper Parliamentary debate”. This suggests that concrete details on economic matters, such as future status of trade and business relations with the EU, could take years to crystallise. As such we feel the pullback in the GBP is largely overdone as investor’s price in an overly pessimistic economic scenario.
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Rebound ahead

Technical indicators of momentum and speculative positioning both point to the GBP being oversold. Speculative short positions towards the GBP are at record highs while both the GBP/USD and EUR/GBP currency pairs are trading over 6% away from their respective 100 daily moving average (DMA). Current levels therefore look attractive points for UK investors with US or continental European assets to establish tactical currency hedges, locking the recent foreign currency gains in their international allocations. The pairs also offer an attractive opportunity for those with a longer term horizon to gain long Sterling exposure at favourable levels. In addition, the Bank of England is unlikely to loosen monetary settings further at its upcoming monetary policy meeting on the 3rd November. Despite previously stating that “a further cut” is expected “during the course of this year” we don’t believe that current UK economic conditions warrant such action. This removes downward pressure on the GBP from monetary accommodation in the coming months. Investors wishing to express the investment views outlined above may consider using the following ETF Securities ETPs:

Currency ETPs

GBP Base ETFS Long EUR Short GBP (GBUR) ETFS Short EUR Long GBP (URGB) ETFS Long USD Short GBP (GBUS) ETFS Short USD Long GBP (USGB) USD Base ETFS Long GBP Short USD (LGBP) ETFS Short GBP Long USD (SGBP) 3x ETFS 3x Long GBP Short EUR (EGB3) ETFS 3x Short GBP Long EUR (GBE3) ETFS 3x Long GBP Short USD (LGB3) ETFS 3x Short GBP Long USD (SGB3) ETFS 3x Long USD Short GBP (USP3) ETFS 3x Short USD Long GBP (PUS3) ETFS 3x Long EUR Short GBP (EUP3) ETFS 3x Short EUR Long GBP (SUP3) 5x ETFS 5x Long GBP Short EUR (EGB5) ETFS 5x Short GBP Long EUR (GBE5) Basket ETFS Bullish GBP vs G10 Currency Basket Securities (LGBB) ETFS Bearish GBP vs G10 Currency Basket Securities (SGBB)

For more information contact:

ETF Securities Research team ETF Securities (UK) Limited T +44 (0) 207 448 4336 E info@etfsecurities.com

Important Information

This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”). This communication is only targeted at qualified or professional investors. The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value. This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States. This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction.  No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek

Investors need to know about currency volatility

Investors need to know about currency volatility

ETF Securities Currency Research –  Investors need to know about currency volatility

Summary

  • Investing internationally requires more careful analysis, with currency risks adding to potential investment pitfalls.
  • Currency returns have recently demonstrated that they can overwhelm movements in foreign assets both on the upside and downside.
  • Current macro trends should see FX volatility persist in 2016 keeping currency hedging high on the agenda for international investors.

Download the complete report (.pdf)

Currencies impact investors

Investing should be a conscious decision by individuals. However, there is a critical part of the investment decision that many investors in foreign assets are not taking into account: currency movements. Most investors trade currencies, but often it is not an active decision. Regardless of the asset class, if an investor is purchasing offshore assets, a currency transaction is being entered into and if this is not taken into account, risk is being understated.

Any offshore investment involves a currency position, unless it is offset by hedging. Whether it is US or emerging market equities, commodities or bonds, any investment that is a denominated in a foreign currency for the investor will involve a currency exposure. It is important for investors to be fully aware of the currency exposures within their portfolio, as it can have a significant impact on investment returns.

As seen in the following chart, the currency component of US equity returns has been significant and varied. The example highlights the returns from a US equity portfolio in 2015, from the perspective of a UK investor. An investment in the MSCI US index would have returned nearly 5% over the course of 2015, largely due to favourable currency movements. The US Dollar strengthened nearly 6% against the British Pound in 2015, offsetting the -0.75% decline in the underlying US equity benchmark.

Although overall the currency movements in GBP/USD and EUR/USD have been favourable, because of the broad based strength in the US Dollar in 2015, there has been significant volatility of currency returns on a month to month basis. This volatility and the resulting magnitude of movements in the currency markets have made the topic of currency hedging a key investment theme of 2015.

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Peak US Dollar and hedging

The Fed’s rhetoric indicates that the central bank is likely to continue its gradual rate hike path in 2016. The market continues to discount the appetite for the Fed to raise rates, expecting just one rate hike by year-end. In turn, near-term strength could turn into longer-term weakness for the dollar.

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Indeed, if, as we believe, the USD peaks by end-Q1 2016, investors will need to be closely attuned to the level of currency volatility and the potential for a falling USD to have an adverse impact on portfolio returns. Our expectation for a USD peak in coming months suggests investors in foreign assets should look to hedge foreign currency (particularly USD exposures).

Volatility to continue to impact returns

While currency volatility has softened in early 2016, it remains elevated from a historical perspective. During the remainder of 2016 a number of factors look set to keep FX markets unsettled. Thus, international asset managers need to remain conscious of inherent currency risks they may assume through offshore assets, because currency movements are rarely neutral.

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Commodity feedback loop for FX volatility

As an asset class, commodities are unique for non-US investors: the investable universe is denominated in US Dollars and therefore should be considered by any non-USD denominated investors as a foreign asset with inherent currency risk. The majority of commodity investors situated outside of the US are therefore directly exposed to currency fluctuations. Unless a commodity investment is hedged, movements in the exchange rate between the US Dollar and the investor’s own domestic currency, directly impact the returns from commodity investments. For example, in 2015 the price of gold fell by 10.5%, but for European investors this loss was limited to 0.3%, due to the 10.2% appreciation of the US Dollar against the Euro over the same period.

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While currency movements can impact commodity returns, the two asset classes also have other linkages. The highly publicised slump in commodity prices has been a contributing factor to the current elevated level of currency volatility and looks set to remain a catalyst for further currency gyrations in the year ahead.

Commodity prices can impact currencies through inflation dynamics. In particular, the current low price of energy is depressing inflation expectations and is making the future path of global monetary policy less predictable. Central bank activism has been a key driver of currency market movements and the prospect of increasingly uncertain monetary policy is likely to keep currency volatility raised.

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In addition, falling commodity prices have damaged the terms of trade for commodity exporters globally and the impact is unlikely to be short-lived. Reduced investment and job losses in resource sectors worldwide will continue to filter through to economic performance throughout 2016 and create instability for currencies underpinning exporting nations.

EM and the demand for safe-havens

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Uncertainty surrounding China and lapses in confidence can cause sharp appreciation of currencies that are traditionally considered a safe haven, such as the CHF and JPY. Investors with exposure to safe haven currencies or EM currencies directly should be aware of the effects that a short term crisis of confidence can have on these currency markets.

These factors have potential to maintain currency volatility at elevated levels throughout 2016 and should give investors pause for thought regarding the source of investment returns for foreign assets in the year to come.

For more information contact

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

Important Information

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This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority.

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Any products referenced in this document are generally aimed at sophisticated, professional and institutional investors. Any decision to invest should be based on the information contained in the prospectus (and any supplements thereto) of the relevant product issue. The price of any securities may go up or down and an investor may not get back the amount invested. Securities may valued in currencies other than those in which there are priced and will be affected by exchange rate movements. Investments in the securities which provide a short and/or leveraged exposure are only suitable for sophisticated, professional and institutional investors who understand leveraged and compounded daily returns and are willing to magnify potential losses by comparison to investments which do not incorporate these strategies. Over periods of greater than one day, investments with a short and/or leveraged exposure do not necessarily provide investors with a return equivalent to a return from the unleveraged long or unleveraged short investments multiplied by the relevant leverage factor. Investors should refer to the section entitled ”Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in any securities referenced in this communication.

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UK Averts Coalition Chaos

UK Averts Coalition Chaos

ETFS Multi-Asset Weekly

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Highlights

Arabica coffee slid 4.2% as Colombian production continues to rise.

FTSE 100 recouped weekly losses after the election result.

Euro downside risk as Greek tension mounts.

Contrary to pre-election polls, the UK has managed to secure a majority government, averting the chaos that many had expected would follow in forming a stable coalition. UK equities and the Pound Sterling strengthened on the news after a week of losses. Meanwhile, with a debt payment due to the IMF tomorrow by Greece, the market is seeking hedges against a potential accident should Euro area finance ministers fail to avoid brinkmanship in their discussions with the cash-strapped nation today. The Chinese central bank cut interest rates yesterday, providing a tailwind for Chinese equities and cyclical commodities.

Commodities

Arabica coffee slid 4.2% as Colombian production continues to rise. The Colombian Coffee Growers Federation reported that the country’s coffee production for April grew 11.06% year-on-year. However, Colombia only produces 11% of global Arabica output. Brazil who produces 45% of global output, has had significant drought damage to its coffee bushes in 2014 threatening the yield in 2015. While some were optimistic about a reversal of that damage due to beneficial rain in Minas Gerais (a key growing area) in recent months, precipitation over the past week has moderated significantly. Added to that, a firmer Brazilian Real removes a catalyst for stock-offloading by Brazilian farmers. We believe that coffee prices could benefit from a tightening in supply from Brazil. While zinc, nickel and copper rose on the hopes of tighter supply this year, aluminum fell moderating the gains from the previous week.
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Equities

FTSE 100 recouped weekly losses after the election result. With markets having braced themselves for chaos, the election results led to a relief rally when a majority government was formed. The MSCI China A-Share index fell 6.4%, moderating its gains after reaching a 7-year high the week prior. A disappointing Chinese manufacturing PMI reading and weaker trade figures deflated some of the optimism in the market. However, that disappointment let to interest rate cut effective today, which should provide the equity markets with a shot of adrenalin. Moreover, with further financial market liberalization on the cards for this year, we expect the domestic equity to undergo a period of secular expansion. This week, a number of Chinese data releases including industrial production and retail sales will help the central bank and investors assess the strength of the near-term growth.

Currencies

Euro downside risk as Greek tension mounts. The Euro has been one of the most volatile currencies this year and this week is unlikely to change that trend. We expect that this week’s Greek negotiations pose a downside threat, especially as the Euro remains elevated against the USD, despite last week’s strong jobs report in the US. We believe the soft patch in US economic activity will begin to fade and support a further rally in the USD. The British Pound was one of the strongest performing currencies last week, following the surprise Conservative majority victory in the general election. Investors will be looking ahead to the Bank of England meeting this week to gauge the central banks desire to hike rates. We expect that tighter policy is a long way off and that GBP/USD will gradually move back toward the levels it was trading at pre-election levels near 1.50.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E  info@etfsecurities.com

Important Information

General

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (”FCA”).

Investments may go up or down in value and you may lose some or all of the amount invested.  Past performance is not necessarily a guide to future performance. You should consult an independent investment adviser prior to making any investment in order to determine its suitability to your circumstances.

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FSA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction.  No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

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