So, one of the central bankers is recommending QE for sterling. Since the UK economy is in even more trouble than the USA, and is much more sensitive to the exchange rate (due to having much more of the economy dependent on foreign trade), it looks like there is an incentive for even more QE and currency devaluation there. With the pound up over 10% from the lows, this looks like a pretty good spot to get short.
GoC and Martin, In my opinion, a more safer play with almost the same kind of return potential would be in shoring Sterling against yen rather than shorting against US Dollar. Couple of points: A. US QE happens, G/U might not go down as much, there is some possibility that actually rally in G/U might continue - given that QE in UK is still an idea whereas QE in US is more likely on cards. B. After BoJ intervenes once again and artificially pops up U/J, might give a good entry point on a long JPY position against GBP. Shorting GBP against JPY will most likely be not affected by future US QE. Risk in shorting against JPY is limited, as there is upward pressure on JPY due to 1. continued deflationary concerns in JPY 2. increased speculative plays against BoJ intervention and 3. v. limited historical impact and velocity of any QE undertaken by BoJ -either by sterlized or unsterlized monetary operations in Japan. Feel free to add your thoughts - as I am sure I am concentrating only on QE in my analysis (because i consider it to be most important right now influencing markets). I might be missing some important inputs.
Well the thesis for the trade is off as Posen is now saying he didn't necessarily think £ QE makes sense. So I've exited at a small loss here. I still think the £ will be a good long-term short but I don't think the timing is ideal right now. Don't think Yen shorting is good, yes they had intervention but it has rebounded to the low 80s already, showing a decent bid for the currency, will the BoK go the whole hog? We don't know, they could give up half-heartedly like the SNB did. Until they finally go Bernanke and kill deflation by printing Yen until prices start going up, I think the Yen will either range or potentially even rally further down to the mid or low 70s vs the dollar. Overall currencies seem pretty tricky right now, the dollar has short-term bearish news but other currencies don't exactly look great in the long run either. My working thesis is we get a bit more dollar decline until there's a capitulation with a day or two of panicky selling, maybe around 1.40 ish vs EUR, perhaps GBP makes a slight new high around 1.61-64, but I don't see much more upside for them than there. I'm neutral to bullish (buy on dips) in the Yen, and moderately bullish on the Swiss Franc, but both have their central banks opposing further gains so it's not unalloyed greatness there either. Gold seems the much easier long-term play, but after such a big run it could correct 5-7% in a flash. Tricky times for currency plays!
GoC - I meant shorting GBP against yen instead of dollar. So, both of us are saying the same thing as far as yen is concerned. USD/JPY going to 70-75 is perfectly plausible over the next 6-12 months, especially given the swiss experience. Btw, maybe you are talking in terms of ccy futures and I always talk in terms of spot ccys so that might be the confusion regarding terminology. When I say long yen, I mean long yen as currency - so in $Yen context, shorting USDJPY pair. Yes, Gold is a good long term play, but the velocity of the current move carries a lot of risk for entering into a long play here. A safer bet imo - buying short term puts and then calls or pure futures once gold corrects a bit. The velocity of recent dollar sell-off has been absolutely amazing - the speed and depth of movements mirror the movements witnessed during the crisis of 2008. Its very hard for me to understand that fears of QE2 can cause such huge spikes in other ccys against dollar at such a pace - still kind of perplexed!
Ah ok, I misread your post sorry, had the figure coming up. Yeah I like shorting £ against the Yen, I actually have on that position albeit probably too small. It's certainly a more "clean" position and not exposed to the US QE risks. This US report certainly puts the cat amongst the pigeons, talk about bad timing on that £ cover lol. As you say, the market has heavily priced in US weakness, further QE etc, and today's data is suggesting maybe it's all wrong. If tomorrow's data also shows strength, watch out below in anti-dollar plays, they have had a big runup and some hot money is definitely in there, it could start something of a correction over the next week or so. Risk has shot up for currencies and gold, at the very least, so I'm taking off some of the gold, hedging the rest with some short-term options, and edging back into that pound short on small size (I actually have on long Yen too so de facto I am long Yen/GBP on part of my position - agree this is a safer and purer play). I'll wait and see how today closes, and then check the reaction to the figures tomorrow before doing more, if they confirm more US economic strength and the market responds with a vigorous dollar rally, then I'll put on some more dollar longs if it goes my way. Overall I'd say short GBP against Yen looks good, and short GBP vs $ may look good too if this move is the beginning of something. For now though, I think the easy money in the dollar short/gold long has been made for the moment. Long-term I still like gold but it's vulnerable here and worth at least hedging with some puts, scaling back to core size, and taking more aggressive positions off the table IMO. If I'm wrong then the obvious signal would be if gold recovers its losses and closes higher on the day, that would signal underlying strength and I'd have to reconsider. Today and tomorrow's session could see some interesting action.
Another question is whether stocks are breaking out here or if this is just a point to sucker in longs before we re-enter the 1040-1140 trading range in time for an October wobble. For example if tomorrow we get bad numbers, stocks could have a really rough time. It's like all the major markets are balanced on a knife-edge right now, so probably best not to have on any big positions.
I could be wrong, but I am bullish generally on stocks. This week and last week's actions in all asset classes, globally has been driven by 1 factor - QE2 in US. There has not been any other factor that has driven any market around the globe - equities, bonds, swaps, ccys, commodities - everything has been driven by dollar selling. The market is pricing in (correctly or incorrectly) that dollar is going the shit-hole which is leading to asset prices inflation around the globe. On a very short term basis, the way I think is that two things can happen (about tomorrow's numbers, ignoring as expected case): 1. Numbers are way good => stocks will take off, all other asset classes will rally. What will happen to ccys (esp. dollar) is anyone's guess since prob of QE2 decreases, which might lead to dollar strength and profit booking by short dollar guys around the world. Dollar in this scenario can rally quite a few points before stopping. In this scenario, UST 10yrs can easily rebound to 2.7-2.8 in 2-3 days. I will say probability of this scenario is say 20-25% (completely intuitive - if you ask me, I can't say how I come up with this number in my head). 2. Numbers are way bad => stocks retreat dramatically atleast for a day or two, but dollar still sells-off and treasuries go to 2.3 - breaking the major support that they have found at 2.5. However, continued weakening of dollar and additional confirmation of QE2 (due to shit numbers) might mean equities may soon find a bottom (say over the next 3-6 days) and start going up again - a bit modestly. So, under both kind of scenarios, I am seeing 1200-1250 on the S&P over next 2 months. My 2 cents.
Precious metals look like death here. Stocks - I wouldn't be short (but I have a small put position), but I'd rather wait for a confirmed breakout to get long. Too much risk either way IMO.