As a function of the UK’s “Leave” decision at the June 23 Brexit referendum, our economists have materially downgraded their expectations for the UK and European economies vis-à-vis the rest of the world. In the same context, we are making material revisions to our FX forecast set.
Having been wrong about the outcome of the referendum, we are lowering our 3m GBPUSD forecast to 1.22 from levels 1.58 previously. This is consistent with the “leave” outcomes we expected when we previewed the possibility back in January. Nonetheless our trade portfolio gained on the week, given our long held short GBP hedge established when still cheap.
We are lowering our 3m EURUSD forecast to 1.05 from 1.17 previously. Our former forecast had anticipated a general jump in European currencies which were all pricing in some degree of Brexit contagion risk premium. Now the bad outcome is realised, we suspect the market will be consistently looking to sell EURUSD rallies.
We are not risk averse across the board – we see this as mostly a European problem. As such we add the following trade recommendations to our portfolio.
1. We recommend buying a 30 Aug 2016 EURBRL put spread, strikes at 3.7300 and 3.5600 for net 2.1% of face value (spot ref: 3.6540). The maximum net gain is around 2.7% if spot finishes at or below our lower strike at expiry. The maximum loss is limited to the net premium paid.
2. We recommend buying a 29 Aug 2016 expiry EURRUB put spread, strikes at 72.30 and 68.80, for net 2.2% of face value (spot ref: 70.98). The maximum net gain is 2.8% if spot finishes at or below our lower strike at expiry. The maximum loss is limited to the net premium paid.
We would like to take this opportunity to remind you of the measures Bank of America Merrill Lynch (BofAML) has in place for trading in volatile market conditions.
In periods of extreme volatility, we have on some occasions seen delays to trades, including requests for quotes (RFQs), order taking, order processing, price streaming and/or market data dissemination. As a reminder, we are not obligated to provide price streaming, respond to RFQs, or accept orders for execution in any particular manner, and all determinations of if, whether, or when market criteria have been met for execution shall be made by us in our sole discretion.
BofAML’s electronic trading platforms have volatility controls that may temporarily suspend execution and price streaming in response to rapid and adverse market movements. It is possible that different clients submitting orders or requesting trades with similar profiles may achieve different outcomes, including whether and when orders or trades will be executed.
During volatile markets, we will endeavour to continue to serve clients but we may not be able to provide the product offering, level of execution, liquidity and pricing – including in electronic markets – as would be the case under more normalized market conditions.
The indecisive price action of late came to end last Friday with the steep decline in governments bonds around the globe triggering major moves. Flight to safety can be seen in record low bonds’ yields, together with strong gold, JPY and CHF through falling EUR-CHF.
EUR-JPY has broke out of its recent range of 122-124.44. Please find attached the daily chart. After several false breakouts in recent weeks, this is a genuine breakout that shall see the pair trading much lower eventually, although another climb towards 122 is still possible.
Next stop: Daily close sub 120.
Victory FX is the owner and developer of the Orbits theory and algorithm. It specializes in identifying genuine (from false) breakouts which trigger major price cycles from their very beginning with exceptional probability of 90% about 10-14 times in a year. Trading universe includes: G10 currencies, gold, silver, oil and US bonds. R&d: 7 years.