The Pound has been a front-runner in the global rush to zero rate expectations this year. Having lagged behind other majors in the global carry wave in the early part of the year, the pound gained disproportionately from the indiscriminate shedding of forex leverage positions during the summer global market rout. The CFTC data has tracked closely the pound’s moves. The near-record shorts that had been built up through June were steadily liquidated during the early months of the global re-pricing of risk, indicating that sterling’s advance over the summer was a matter of short-term positioning rather than renewed confidence in the pound’s haven qualities. In that sense, sterling has been the beneficiary of this year’s “rush to zero” for global policy rate expectations, mainly due the fact that the markets abandoned BoE rate hike hopes before the notions of a global recovery and an international policy normalization cycle were delegated to the rubbish bin.
The other dimension that has played an increasing role for G10 currencies is the political risk one. The UK’s low political and policy risk premium compared to the euro area is a haven with respect to the UK’s credit AAA rating short-term, and the recent relaxation of regulatory bank capital pressures through the delay of planned structural reforms will limit the government’s implicit liabilities in the banking system. But the government has no safety net to offset a much weaker real economy backdrop or shrinking revenue flows from the City, which is a recipe for growing fundamental pressure on the UK’s debt sustainability outlook. A large share of financials in the FTSE and UK consumers’ vulnerability to weaker house prices due to high indebtedness import euro zone banking and global capital markets illiquidity as risks to the UK real economy. With financial stresses and economic weakness spreading globally, the strengthening correlation between Cable and EUR/USD shows that the markets are looking at UK domestic fundamentals from the position of the global transmission of risks. The BOE could look to further moves in the future to ease policy and push Cable through support creating a binary option trading opportunity.
The Trade – Purchase a daily binary option put on a daily close below 1.5880, with a floor at 1.5820.
Signal Summary
Asset : GBP/USD
The trade : Binary Put Option
Expiry time : End of day
When : On a daily close below 1.5880, with a floor at 1.5820.
The result : Triggered on 09/12/11 and expired in the money on 09/13/11
