Long GBP/NZD (From 9 July to 11-July)
Real-Time AmpGFX – Sold GBP/NZD to close long position, strategy update (Wed 7/11/2018 2:53 PM MT)
Sold half unit GBP/NZD at 1.9539 to close long position.
Comment
The risk around the GBP remains high, associated with the heightened focus on the debate inside the Tory party and how a new plan will be received by EU negotiators next week.
The tabling of the Tory Cabinets white paper in parliament on Thursday may generate more volatility and we wish to square up a see how events unfold.
When we took this position we did not think there would be resignations in the Cabinet on the Monday.
We chose not to close the trade as we assessed that the plan is the best compromise and hoped that the Tory party would accept it (begrudgingly for some). However, there are efforts by Eurosceptics to change the Chequers agreement and threats to vote down any agreement based on it.
We still think it has a good chance of being accepted in principle by the EU negotiators. But in the process, there is a high risk that there will be more turmoil in the UK parliament as the details are discussed.
The threat of an agreement being voted down in the autumn is significant, which would trigger a government crisis in the UK. This risk will continue to hang over the GBP for the time being. It is hard to see the market getting too confidence ahead of this vote.
With the trade tensions dragging down the NZD, we were able to make some profit on this trade, which was the other half of why we took the trade. We remain short AUD and NZD vs EUR and CAD anticipating softness in Asian currencies. Specifically, risks are increasing for AUD and NZD with the housing market slowing in Australia. The ANZ monthly inflation data suggests NZ inflation will be tepid when released next week.
The CAD has been undermined it seems in part by a deep fall in oil prices, but its economic data is generally showing strength, and the BoC has reasserted its forecast for gradual rate hikes. I also think there is a significant chance of more positive news coming down the pike on a NAFTA agreement. Or at least the US concentrating its trade efforts on China and delaying any action against the EU and NAFTA.
Positions
Long half unit of EUR/AUD at 1.5824; s/l 1.5673; t/p 1.7234
Short half unit NZD/CAD at 0.8914; s/l 0.9013; t/p 0.8513
Short half unit NZD/CAD at 0.8914; s/l 0.9013; t/p 0.8513
Real-Time AmpGFX – update on UK political developments (Mon 7/9/2018 10:11 AM MT)
I did not expect Davis or Johnson to resign.
However, it still appears to me that May had a win on Friday when her cabinet signed up to the plan.
The plan appears to be the only workable compromise.
Without a compromise, it is either a hard Brexit, or a no Brexit. The paths to either are very damaging for confidence and cohesion in the UK public and economy. It is not clear that these paths would be other than dead ends. This reality has prevented these paths from being taken so far, and I expect will ensure that the UK will keep moving towards a workable compromise.
Davis and Johnson appeared to have conceded to the cabinet view on Friday, and then backtracked when they read the tea leaves from their supporters in public and parliament. This appears to make them look weak.
May has received support from the other prominent Eurosceptic Michael Gove, who is reported to have urged the party to support the plan. May has been able to quickly replace Davis with Raab as Brexit Secretary, another Eurosceptic, which suggests she has been able to split the Eurosceptics.
I read and hear a lot of criticism of May’s leadership. But she is still here, she has the only credible plan, she has been battling between idealists that fail to offer an alternative compromise. The delays in coming to this plan are only natural when you have to hold this group of people together.
The EU is not negotiating since they cannot be sure the UK has a plan it can stick to. Some EU players are still holding out for a collapse in government that leads to no Brexit, so they make statements designed to stir the pot. Only when the UK government appears to have a plan they are serious and committed to will it force the EU negotiators to play ball.
Could Johnson now launch a leadership challenge? To do so would be to ask his party to take ownership of a hard Brexit. He has no workable version of a less soft Brexit. As such there does not appear to be any alternative to May’s leadership.
If May gets through this period, appoints a new foreign secretary, it may appear that she has won and pushed through this difficult period and diminished the power of the Eurosceptics. In which case the EU may feel they have to give her new plan a fair hearing.
Johnson appears to me to be a political opportunist that has tied himself to Brexit, and now has no choice but to keep pushing for a hard Brexit otherwise he would have no support base.
Johnson could decide to make a challenge if only to demonstrate his bravado. He has the potential to be disruptive and unsettle a skittish market. I suspect this would be a failure, and in the end, might be viewed as a buying opportunity for the GBP.
If Johnson could recruit Gove to his side, that might be viewed as critically damaging May’s leadership and deal the GBP a big blow. But would this really be the group of people that could lead the country? Gove would have made another backflip. The risk is a disastrous government, crashing out of Brexit, new elections, the public and government swinging back and forth between hard and no Brexit, and economic melt-down.
As an Australian living in the US, taking views on UK politics, I do so cautiously and a recognition that I don’t fully appreciate the nuances. I decided to dabble in a long GBP position on Monday. I am watching this closely, and accept there is a risk that I have been caught out by renewed turmoil that could get worse before it gets better.
Perhaps I was naive to expect the Tory party to hold together behind May. It still seems like the most sensible path for the party to take. At this stage, I am holding on to the position to see if May can prevail. Again.
Real-Time AmpGFX – bought GBP/NZD (Sun 7/8/2018 1:41 PM MT)
Bought GBP/NZD half unit at 1.9494
Comment
GBP has firmed on news that PM May has prevailed in gaining cabinet support for a Brexit negotiating plan. We expect that this will reduce Brexit/political uncertainty in the near term.
UK PMI data in the last week was better than expected, and showed more improvement than other G4 countries.
Carney was upbeat last week, raising odds of a hike on 2 August (80% priced in). Data this week may continue to show relative strength in the UK.
Recent NZ data has lost momentum, milk prices have retreated.
US/China trade relations remain fraught. We see risks towards easing trade tensions between the US, EU and NAFTA, as we discussed last week (Shifting Trump trade rhetoric may support EUR and CAD against Asian currencies).
Positions
Long half unit of EUR/AUD at 1.5824; s/l 1.5673; t/p 1.7234
Short half unit NZD/CAD at 0.8914; s/l 0.9013; t/p 0.8513
Long half unit GBP/NZD at 1.9494; s/l 1.9233; t/p 2.0623
Our Capital at Risk: 140bp (GBP/NZD); 101bp (EUR/AUD); 104bp (NZD/CAD)
By setting an initial stop loss of 1.9233 on our GBP/NZD trade, our (AmpGFX) percentage loss would be 1.34% on this trade. Based on our trade size this represents 140bp or 1.4% of our trading capital.
In the past, I have provided some guidance on the relative size of our trades using “units”. I am working on providing a clearer understanding of the actual amount of capital we have at risk, as reflected in the results we report on our website.
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