Which currencies out of GBP/USD/EUR are due for a move higher?
When I started at IG during the first week of the new millennium, I was sat next to an experienced trader with a manual and an instruction of never being afraid to ask a question. I probably asked hundreds over the ensuing months. I remember asking why people would trade currencies rather than shares or a stock index. These seemed much more tangible to me, having grown up looking at share prices. The swift retort in a Chingford accent was that the world of currencies were the most liquid market in the world and my question should have been why would someone NOT trade FX. He then let on that he had been a Forex trader beforehand and was amazed that less than 10% of deals back in January 2000 were on this product set.
Back then, E/$ traded on a 6-pip spread, with the forwards being around 10 pips wide.
It was the most popular FX cross back then and was flip-flopping close to parity (i.e. a ratio of 1 Euro to 1 Dollar — 1:1) in my first month learning the ropes on the dealing desk.
It then dropped to 0.85 in the ensuing 2 years, before the Euro soared close to 100% over the next 7 years before dramatically losing its lustre during the financial crisis where it gave up 20% in a matter of months.
How times have changed!!
Nearly two decades later the volume of retail trades taking place in the world’s most liquid market is truly staggering. It is not just institutions that account for trillions of dollars worth of notional trades.
Around 40% of trades for the major retail brokers in the CFD space are now on FX, whilst a plethora of brokers around the globe who don’t care for regulation would have considerably higher percentages of trades on the belief that one currency will appreciate against another one.
E/$ remains the most traded market, but rather than trade on a 6-point spread, a spread around just 1 pip is now commonplace. Back in January 2000, I recall IG offering around 8 different FX pairs. Again, how times have changed!! One can now trade a vast array of crosses ranging from Turkish Lira to Hugarian Forint to the Mexican Peso and Russian Rouble as well as Chinese Renminbi and Indonesian Rupiah!
At last count, there were over 100 pairs, whilst I have seen one broker claim over 150.
At Pelican, we don’t bother with offering markets that no one wants to trade. Instead we offer speedy execution on the FX pairs that matter to you.
So where might we expect E/$ to go in the coming months?
A year ago, much trader talk was about when E/$ would hit parity. There was all the uncertainty over the European political scene and the US seemed intent on a tightening interest rate policy (i.e. rising interest rates, which generally means that the currency in question should appreciate against other currencies where interest rates are static or likely to fall). I recall articles from certain banks predicting 1:1 on New Years Day 2017 when E/$ was around 1.04 in December when they were sending out their predictions for the New Year.
I don’t recall any supposed experts calling for the Euro to rally nearly 17% in just eight months against the greenback (slang for the US Dollar). Well, that is exactly what happened! The renewed vigour of the Macron factor coupled with Aunt Angela being voted in for a fourth term in office, although on a far less secure footing, has helped restore faith in the European currency.
The past couple of months has seen the Euro pause for breath and phrases such as a healthy degree of profit-taking be bandied about. There is talk that an assault on 1.30 is in the offing.
There is certainly much debate within Pelican groups about whether the next move is indeed a reignition of the upward move or whether the Euro bears will be proved correct and Donald Trump’s economic reforms will further boost the US Dollar.
Personally, I think the Euro rally has got ahead of itself and in particular against the Dollar, so that we could see a move to below 1.10 in the coming months.
Remember that only with Pelican you can join public groups to discuss the financial markets that matter to you as well as create your own private groups to discuss, copy or even oppose the trades of your friends and work colleagues.
The chart above is the Euro against another major currency.
Similarly to the E/$ chart, you can see the damage done by the financial crisis to the Euro as it endured a torrid seven years of weakening from late 2008.
Two years ago, the Euro was at 0.70 versus this other currency. In terms of the last 25 years’ range of trading the Euro is 4,000 pips. It now sits only 20% from its high against this other currency, whereas for E/$ that has had a 7,700 pip range, the Euro is 55% away from its high.
Given there was a sharp acceleration in the price in June 2016, it doesn’t take a lot of thought to realise that I am displaying E/£ in the above example.
Sterling is suffering on all counts post the debacle of Brexit, as Brits traveling abroad on their holidays are discovering to their cost but also for importers. The only boon is that weak Sterling still makes the UK property scene comparatively attractive as a sensible diversification investment for non-Brits and also it is greatly aiding our small army of exporting manufacturers, especially if their natural resource is already available here.
As of last week, the majority of Pelican clients were bullish Euro versus Sterling. As readers of my articles know, I prefer to go against the herd, but if I was forced to come off the fence, I would certainly side with the majority. I see parity in E/£ at some stage next year and certainly before E/$.
If I think E/$ will fall, yet E/£ will rise, what does that mean for £/$? Up or down?
This was similar to a question in my first dealing desk test at the end of my first week at IG back in January 2000.
Hopefully, you could deduce that I am bearish £/$. In other words, I think it will fall.
Quite whether it will fall to the levels that a very experienced Hedge Fund Manager friend believes is another matter. He calls for a level of 0.70 in the next five years as Britain will feel the full ramifications of its exit from the EU in a most painful way.
The graph below of £/$ would look very scary should a move down through parity to 0.70 come to pass!
Yet this currency pair has already fallen by some 9,000 pips from 2008 to 2015. Another 6,000 over a 5-year period would actually sound correct if you extrapolated this first move over the next few years.
But for the sake of UK plc, I very much hope that he is incorrect in his rather extreme sounding view!
I expect us to see £/$ (or Cable as it is commonly known) to fall to the “1-noughts” early next year. i.e 1.09 or below.
To sum up, I expect the US Dollar to lead the way in the coming months, appreciating more than the Euro, which in turn will rise more than the British Pound, which will languish at the bottom of the class…
Whatever your view on the major currencies mentioned here or even some rather less well know pairs, Pelican is the choice of the experienced trader wanting to build his or her private or public discussion groups. Within your groups, you can see others’ positions, copy or, uniquely, oppose trades, all within a unique FCA-regulated environment.
