Tuesday, 4 October 2016

Noise signal in the Pound.

Oh look, the Pound is at levels not seen since the last time and the FTSE is at a number. So say all my twitter feeds over and over again. No comment on where it goes next, just where it is now. Which is as useful as a bag of sick.

One of the most important trading indicators of the last 3 years, in this effectively mean reversionist market, has been journo-noise. Toys out of prams, headlines, panic screaming and pointing at numbers with no reference to what may happen next, other than pulling out a ruler and pencil and implying that something terrible will occur (have you ever heard them do the reverse and imply something wonderful will happen in the future?). I am convinced that journo-noise trumps fast moves, rulers and pencils as a signal and I am convinced that this morning’s cacophony of Sterlingness is a signal.

The price of GBP has fallen and it is assumed that it is related to Brexit. Though the chance that it is related to Brexit is pretty high, it's worth pointing out that no one actually knows for sure. Correlation, causality and all that. The reason GBP is lower is that the natural equilibrium between buyers and sellers has moved. Or in 'spot shag' talk, someone sold it and no one bought it. Now, unless you wish to ask every seller of GBP in the market why they sold GBP you will never know for sure why GBP has fallen. I know this sounds pedantic but though the probability is hugely skewed towards it being Brexit, it is important to know that it isn’t a 100% certainty on which to base secondary assumptions, which is what our brains tend to do with anything over 50%.

Anyone who as worked in the FX markets will know that momentum is a major factor for model trading accounts and they will follow trends no matter what the cause. Technicians will trade no matter what the background and VaR models respect no macro. But we all like to think we know why things happen.

But, pedantry out of the way, if we  take it that the move is Brexit linked, does it tell us anything about tomorrow? The news was out on Sunday. The news was that Article 50 will be triggered. No surprise other than to those still at the ‘Denial' part of the Kubler-Ross curve of grieving. So no, it doesn't really.

Next is the assumption that a weak GBP is terrible, terrible news. Most G7 nations would give their eye-teeth for a currency devaluation. One of the main reasons for the economic stresses in Europe is that Germany is benefiting from an artificially low exchange rate. A weak pound can benefit the UK in the same way. We should also note that attention is always applied to the most spectacular GBP cross. GBP/USD may be at impressively long time lows, but EUR/GBP was toying with parity much more recently. USD strength over the last couple of days is exaggerating cable moves.

Here I may be opening myself up for abuse but I feel that May and Hammond are actually very smart people, especially compared to the last incumbents, and despite the sound-bite sniping that is aimed at them, will handle things in a sensible manner. The fact that they are not telling us their every move is to be expected. I am sure that there are multi-layers of diplomacy at work and, as one of the most important issues for all sides is ‘face saving’, staying quiet and avoiding a 'them and us' media sponsored battle is to be expected. Of course, everyone wants to know what will happen, but as with Christmas, we will probably have to wait for Christmas.

Last suggestion, which I’ve made before - Any comment on where a price is should be accompanied by a view as to why it matters.

Positions -
I am adding Long GBP/USD through today. It could be called an emotional trade but GBP is an emotional trade.
Long USD/JPY from friday, so call that long GBP/JPY
Long USD/TRY still.
Long Oil still.
Short BTP’s still post Draghi
Long Trump to win. Wild prices but back at 25% it still looks cheap as a hedge.


PeakBeta said...

To this point, it seemed that the media furore around the demise of the long end reached a fever pitch just around when US 30 years were about 2.5%...

Robert in Chicago said...

Long oil??? You should talk about that. I'll copy the comment that I posted on Macro Man yesterday (which may have been my first-ever post on MM, I'm not a big commenter):

Short-oil looks like the best macro-trade set-up I have seen in a long time. Not the highest potential payoff, but the highest odds of winning. This is a microeconomic analysis more than a macro one. I have been an antitrust expert and have been paying attention to this precise "OPEC-announcement" issue for over 25 years. Decades of consistent history demonstrates that, when OPEC announces an "agreement" for an _aggregregate_ production level that does not include the specific country quotas, they haven't really agreed to anything yet, and probably won't. Even if they agree to quotas, they might need to raise the aggregate target to do so. Even if they get to quotas that sum to the announced target, members usually cheat on their quotas. And even if they don't cheat, the announced OPEC target may not lead to a reduction in global output, because other producers will increase.

cantdeletemyf-ingaccount said...

Is it wise to be long USD/JPY if you're expecting a Trump win? That's what's holding me back.

Polemic said...

No. But at the moment trump is too cheap and JPY too rich.
I treat the trump bet more as insurance. I really hope it doesn't come to pass.

Anonymous said...

@Polemic - Excellent post. I have just left MacroMan's blog (which has descended into utter drivel, with MM spoiling his interesting market commentary with infantile, puerile political rants). Anyway glad I found this. Thanks for your efforts.

Polemic said...

You are welcome anon.. though if you were to ID yourself with a little more than an anon I will know when it's you in future.
I was watching the MM comments develop aghast. We are seeing far too much sound bite crime in today's politics with folk using sound bites as political clubs. Take a complex issue, pick out something you don't like the sound of and extrapolate to an extreme which usually supports Godwin's Law. Brexit is going to be incredibly nuanced so assuming that limiting immigration leads to mass deportations of the folk the country needs and beyond to some pre-genocidal maelstrom is complete tosh.

As we have seen with Europe, many commentators expect an all or nothing result. Black or white, and end up confused at a grey muddle through middle line. I can see the same thing with Brexit expectations. It is hugely complex but complexity does not suit soundbite politics and though it is assumptive to think so , Occcums Razor does not often apply in the real world.

Thank god most commentators aren't diplomats. Or rather, there is no way they would ever be diplomats.

Anonymous said...

@Polemic - I fully agree. Politics and markets are complex beasts, the human error of reducing the complexities of both to a naive, biased opinion is a fault that many share. I look forward to more of your posts.

Mike said...

Following on from Anon and Pol's comments, some may find this brief article interesting (the writer is an ex-wall st options trader of many years):

Celeriac1972 said...

Indeed! Through the Brexit vote, the UK has found a winning strategy in the currency depreciation ugly-contest.

Thank you for sharing some info on your positions. I agree re Trump. I'd rather be short oil from (say) 50. Yen - as always - an enigma wrapped in a riddle.

Anonymous said...

Funny how every DM wanted to devalue their currency via ZIRP/QE - we were told "this is a good thing", but when Brexit devalues sterling by 17% we are told "this is a bad thing". lol.

I have now taken to voting for any anti-establishment politician on principle.

cantdeletemyf-ingaccount said...

The difference is what is causing that currency weakness. With QE/ZIRP, the currency weakens because the central bank increases supply of the currency, altering the supply/demand balance. With Brexit, the currency is weakening because investors have decided to attach an enormous risk premium to the UK's economic future. Now, that may help cushion the economy from any potential negative effects from Brexit, but are you seriously trying to argue that it is a good thing the UK is now perceived to be a riskier place to invest in?