FX Convictions – Closing sterling short

by: Georgette Boele , Roy Teo

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In this publication: Our stop loss (profit protection) was hit at 1.4675 in GBP/USD… because of a strong recovery in sterling… and a weak US dollar. Sterling will likely move lower ahead of the referendum… and recover afterwards if the UK remains in the EU. We maintain our short EUR/NOK call.

160502-FX-Conviction-update.pdf (153 KB)

GBP short closed

Despite continued uncertainty surrounding Brexit, sterling’s (GBP) recovery has continued for the last three weeks. For a start, the recent polls show that the odds for the UK remaining in the European Union have increased and this has supported sterling. In addition, the US dollar has fallen following weaker than expected US Q1 GDP, which has decreased the likelihood for Fed rate hikes this year (our base case). Moreover, investors have chosen to take profit on short positions in the GBP spot market but maintain their hedge against a possible Brexit via the currency options market. Today, our stop loss/profit protection at 1.4675 in GBP has been hit. On 26 November 2015 we recommended to short sterling versus US dollar and our total return, after closing following the stop loss (=profit protection), is +2.85%. We continue to hold on to our view of sterling weakness ahead of the referendum on 23 June. Our base case remains that UK stays in the EU and sterling recovers again after this referendum.

We maintain short EUR/NOK

We remain positive on the NOK because we expect a further recovery in oil prices during the course of this year. In addition, we think that further rate cuts by the Norges Bank are unlikely.