Selling the GBP/USD Rate is Still the Hot Ticket say Westpac
For the second week in a row the High Conviction model at Sydney’s Westpac Bank has the GBP/USD exchange rate in its sight.
Pound sterling is a sell against the US dollar argue analysts at Westpac Global Strategy Group who have the trade as their number one recommendation for the second week running.
The call comes at a time when the British pound appears to be reversing a short yet sweet bounce witnessed on the 16th and 17th of May.
Indeed, we report here that strategist Stephen Gallo at BMO Capital had the 1.4450’s as a sell trigger before the week even began.
“We remain short GBP for yet another week, that position opened at 1.4710 on 3 May, stop 1.4605,” says Rob Rennie at Westpac in Sydney.
Rennie notes that downside momentum in GBP has faded but even absent Brexit risk, reasons to own GBP are few and far between, soft April inflation data is seen as only adding to the recent run of weaker data which includes a range of PMIs, IP, construction and house price data.
“GBP remains a favoured short for the model for another week (- 14.9% of the portfolio), a large current account deficit and the outperformance of Gilts the major signals driving that position,” says Rennie.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3347▲ + 0.15%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2893 - 1.2946 |
**Independent Specialist | 1.316 - 1.3213 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
The “High Conviction Trades" model blends the long/short/neutral recommendations from three of Westpac’s research streams: G10 FX model (quantitative analysis), ForeX focus (macro analysis) and technical analysis.
“The aim is to underscore our highest conviction ideas,” says Rennie, “we use simple and transparent rules to generate trading positions.”
When all three inputs on a currency are aligned, long or short, their conviction levels are high and they execute a position at market.
When two of three inputs are aligned they leave orders, an approach that is more compatible with slightly more cautious conviction levels; and lastly when their inputs produce a net neutral bias they stand aside.
The model has returned +10.2% since inception.
Backing the Dollar for a Few More Weeks
Westpac have also indicated they are forecasting further strength in the US dollar over the remainder of May 2016.
As noted here, May typically favours the US dollar, and on evidence so far there is little reason why this month should not continue delivering profit to those who bet on an USD advance on May 1.
The dollar is back in favour as markets increase their bets that the US Federal Reserve is looking increasingly open to accelerating their pace of interest rate rises.
Fed officials, even doves like Rosengren and Kaplan, are signalling that June is live and 2-3 rate hikes "make sense".
That, along with strong April retail sales, resuscitating Q2 growth hopes and a surge in the April CPI that was more than just a gasoline story, has seen interest rate markets finally "get the message".
June Fed hike probabilities having risen from near zero to 15% in recent days, while the yield curve is at its flattest levels since 2007 and the Bund-Tsy 2yr spread is pushing in the USD's favour again.
FOMC minutes this week and a long list of Fedspeakers in the next two weeks including Chair Yellen, Deputy Chair Fischer, Dudley, Tarullo, Bullard, Williams, Harker, Kaplan and Powell should see June hike probabilities continue to firm, probably toward 25% before they stabilise.
“Highly doubtful that the USD will continue to ignore that. Upside risks to the USD should not extend much beyond May payrolls (3 June) though, striking Verizon workers and auto supply disruptions after the Kumamoto earthquake could see May payrolls print as low as 100k,” says Rob Rennie at Westpac Global Strategy Group.
Westpac continue to advocate for further dollar strength through May, a month that is historically a positive month for the Greenback.
