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In the recent past, shorts in GBP positions are activated to carry out as the FX market appears to be acknowledging the veracity of a Brexit process that is effectively stalled. We decisively devise trade strategies not to curb our GBP shorts vs USD and JPY ahead of hawkish tilt from the BoE last week as we felt that the EU summit discussions had the potential to serve as a wake-up call for a market that had hitherto appeared disinterested in the lack of substantive progress that has been made towards securing a withdrawal agreement. The leaks of the draft statement have crystallized this risk with the EU hinting fairly clearly of the need to step-up preparations for a no-deal Brexit, albeit also indicating flexibility should the UK soften its red-lines over, for instance, the ECJ.
As discussed in the introduction, the reduction in Eurocentric political risk combined with the improvement of the continental data flow warrants rotating cash positions in GBP from JPY and USD into EURGBP and GBPCHF.
In addition, the release of the BoE’s latest Financial Stability report yesterday this week highlighted the material risks of a disruption to financial services from Brexit, a finding that is at odds with the rather more insouciant attitude of a hawkish-leaning MPC and also the front-end of the UK curve (which prices a 2/3 chance of an August hike).
We keep a vestigial option short in cable through a 1m put RKO. We will collect time decay from the RKO assuming the cable is held in check close to the 1.31 strike over the next few weeks by the conflicting forces of less impressive US data and a continued lack of progress on Brexit. The next potential Brexit flashpoint focus will be the cabinet offsite next Friday at which the PM will once again attempt to hammer out a common government position on customs policy, the single market, and associated Brexit red-lines.
Square off cable’s any short positions in spot trades for a considerable return. While Activate a 1.31 GBPUSD put, RKO 1.28 expiry 27 July. Paid11.5bp, marked at 10bp.
Square off shorts in GBPJPY at +0.31%. While Put Ratio Back Spread is the most conducive strategy for this pair that contains - shorts in 2w (1%) OTM put option (position seems good even if the underlying spot go either sideways or spike mildly), simultaneously, long in 2 lots of vega long in 2m ATM -0.49 delta put options. A move towards the ATM territory increases the Vega, Gamma and Delta which boosts premium.
Buy EURGBP at 0.8860, stop 0.8650.
Short GBPCHF at 1.3051, stop at 1.3350. Courtesy: JPM
Currency Strength Index: FxWirePro's hourly USD spot index is inching towards -41 levels (which is bearish), while GBP is flashing at 14 (which is neutral) while articulating at (07:05 GMT). For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex
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