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Foreign Exchange

GBP: Short and caught, long and wrong and the reverse barometer

I’ve been thinking mainly in clichés recently, prompted by the sharp reversal in GBP. I get sent a lot of excellent research that I should mention more often. Several analysts pointed out last week that while the trend may be your friend, speculative GBP shorts at the International Monetary Market were at all time record levels, suggesting the market was vulnerable to a sharp correction.

This duly materialised, much to HiFX’s chagrin perhaps – you might remember them from last week.

This week, Bank of New York Mellon’s Neil Mellor switched his attention along with many others to the AUD. He cautioned: “As rosy as its outlook would appear, the AUD looks ripe for some correction.”

He added: “While the AUD may not be a contender to emerge as a major reserve currency alongside the likes of the EUR, ‘minor’ currencies such as the AUD cannot absorb large inflows without becoming quickly overvalued. On this basis, AUD/USD looks well placed to revisit its highs last year when the pair got within a whisker of parity. However, be that as it may, investors would be well advised to pay heed to pressure warnings given that any correction could turn out to be a particularly painful affair. With AUD/USD trading at USD 92.40 – nearly two standard deviations above the Millennium average of USD 0.69 cents – some buying may plausibly tail off as psychologically challenging levels approach. Perhaps most significantly, however, is positioning in AUD futures. CFTC data show that speculative long contracts in the AUD currently total 52,647 – more than double the average long position in the past seven years and the level that coincided with the Aussie’s collapse last autumn. Given GBP’s sharp rally this past week – a function, we believe, of similarly bold (short) positioning – the realisation of some profit might therefore be considered prudent under the circumstances.” At the time of writing, this looks like a good call, or perhaps I should say put. The invitations to the year-end parity party have again been put on hold.

It’s so easy to get it wrong. For instance, only yesterday I strode into the Euromoney office unusually suited and booted for a swanky bash held by BNP Paribas. My esteemed editor took great delight in telling me that not only had I got the wrong day, but actually the wrong month. “Once a jub, always a jub,” I thought.

So perhaps I shouldn’t be too harsh on HiFX, which you may recall sent out a piece of publicity puffery last week, almost at the exact moment GBP rallied: (see The view from the helicopter). LOCK INTO EXCHANGE RATES NOW AS STERLING REMAINS VOLATILE, WARNS HiFX, it screamed. Like I said, we all make mistakes, but as I learnt early in my career, the thing to do is admit them.

I sent HiFX’s PR another email this week on the basis that there’s nothing like kicking someone when they’re down. “How was HiFX to know that GBP would abruptly reverse and go bid? I mean, we all knew the world and his brother was short, but the trend’s your friend and all that. Anyway, after chopping at the top of the day – actually the top of the last six-months, if I’m honest – I find a positive slant to the whole debacle: I’m pleased to announce that HiFX has won the inaugural weeklyFiX REVERSE BAROMETER AWARD,” I wrote.

My goading elicited a response. “Further to your emails last week and yesterday, we wanted to clarify a few points around the press release HiFX posted entitled ‘Lock into exchange rates now as sterling remains volatile,’” the PR said.

Later it added: “We did not offer a view on the market,” before concluding: “To avoid any further confusion we will only send corporate releases that are relevant to the Euromoney audience.”

Interesting point, as well as possibly a huge result for me. Though I still want to test if HiFX is indeed an accurate reverse barometer.

Naturally, I had to try and get the last word in. “With respect,” I wrote, “this (reply) is nonsense. ‘We did not offer a view on the market.’ Then why scream: ‘Lock into exchange rates now’? That is as clear a view on the market as I have seen since I started as an FX broker in 1981. I’m a passionate believer that individuals can manage their FX exposure relatively easily, perhaps even more so if they discount the non-advice HiFX offers. Anyway, about the award, when do you want to pick it up?”

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