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Pound Traders Look Beyond Brexit Noise to Focus on What Matters By Bloomberg

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© Reuters. Pound Traders Look Beyond Brexit Noise to Focus on What Matters

(Bloomberg) — Pound traders who have grown used to Brexit brinkmanship between London and Brussels are making two assumptions: there’ll probably be a trade deal, and U.S. elections matter more right now.

It’s spurring demand for pound-bullish option bets and putting a kink in the currency’s volatility curve, which peaks at the one-month tenor. That’s well beyond the U.K.’s self-imposed Oct. 15 deadline to strike an accord with the EU, but just in time for the Nov. 3 vote in America.

Britain and the EU have been at a similar impasse in the past, only to reach some sort of compromise at the very last minute. With signs that officials are more upbeat — at least in private — when it comes to the prospect of clinching a deal, there’s little reason to believe that this time will be any different, the thinking goes.

Meanwhile, the possibility of a contested U.S. election is uncharted territory for markets, and deserves a higher risk premium given the stakes.

Deja Vu

In sign of the market’s positioning, sterling held its ground when the U.K. government warned Wednesday it would pull out of trade talks with the EU if there is no clear deal in sight next week.

Out of a notional 19.8 billion pounds ($25.6 billion) that traded through the Depository Trust & Clearing Corporation this month, 63% were pound calls, up from 44% in September. The CME Group (NASDAQ:) announced Wednesday that it executed the largest single options trade ever, a three-month pound call with strike at $1.40.

Risk reversals — a gauge of market positioning and sentiment — also show a familiar pattern unfolding when Brexit negotiations seemingly break down. Initially, demand for dollar upside exposure intensifies sharply when concerns grow, yet quickly retreats after the first round of hedging goes through.

Bets Are On

Over-the-counter trades paint a similar picture. There is large interest for so-called downside digitals in euro-pound and call spreads in cable, according to traders in Europe, who asked not to be identified because they are not authorized to speak publicly.

Investors are also going long volatility on structures that expire by end-October, early November, essentially betting that the pound may see large price swings around the U.S. presidential elections, the traders said.

Data Friday showed the U.K. economy grew at less than half the pace anticipated in August even as the government stepped up efforts to revive the beleaguered hospitality industry.

Given concerns about the pace of the recovery, and lingering global risks, options gauges show sentiment over the pound remains bearish overall in the medium term. But for now, the latest bets show a clear preference for the currency.

  • NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

 

 

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Forex

USD/CAD Stalls, GBP/CAD & NZD/CAD Soar

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CANADIAN DOLLAR PRICE OUTLOOK: USD/CAD SELLOFF SUBSIDES AS GBP/CAD & NZD/CAD EXPLODE

  • USD/CAD selling pressure stabilizes as the Canadian Dollar edges lower with crude oil prices
  • GBP/CAD price action rocketed higher on Wednesday largely due revived Brexit negotiations
  • NZD/CAD has potential to extend even higher if key economic data due for release permits

The Canadian Dollar came under fire during Wednesday’s trading session. Loonie weakness looks partly driven by disappointing Canada retail sales released in the morning, which crossed market wires with a 0.4% month-on-month increase for August compared to the 1.1% rise expected and 0.6% gain reported previously. A notable drop in crude oil prices could broadly explain Canadian Dollar downside as well owing to their typically strong inverse correlation. A pause to the sharp slide set forth by USD/CAD price action recently also seems to follow relatively more tepid US fiscal stimulus hopes.

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USD/CAD PRICE CHART: DAILY TIME FRAME (03 JUL TO 21 OCT 2020)

USDCAD Price Chart Canadian Dollar Technical Forecast

USD/CAD caught a bid after colliding with the 1.3100-price level. This area of technical confluence is underpinned by last week’s low in addition to the 76.4% Fibonacci retracement of September’s trading range. USD/CAD might have a little more room to extend its relief bounce, but a bearish trendline extended through the series of lower highs notched this month could undermine rebound potential. The 1.3200-handle also stands out as an intimidating zone of technical resistance.



of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily 5% 7% 5%
Weekly -22% -5% -18%

Although, eclipsing this technical barrier, perhaps catalyzed by a breakdown in US fiscal stimulus talks, could open up the door for USD/CAD bulls to make a quick push toward the 1.3400-price level. On the other hand, dropping below the 1.3100-mark again might indicate a resumption of USD/CAD selling pressure with the 31 August swing low standing out as a potential downside target.

GBP/CAD PRICE CHART: DAILY TIME FRAME (01 JUN TO 21 OCT 2020)

GBPCAD Price Chart Canadian Dollar Technical Forecast

GBP/CAD price action ripped higher on Wednesday in large thanks to revived Brexit negotiations. A positive reaction by the Pound Sterling to the latest Brexit development helped send spot GBP/CAD on a 275-pip surge to the strongest level in three-weeks. GBP/CAD now trades back above its 200-day simple moving average, which could open up the door to bullish continuation.

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This might be facilitated by Bollinger Band width expansion as was witnessed late July. That said, monthly PMI reports due for release later this week could bolster the Canadian Dollar relative to its Pound Sterling peer if the leading indicator highlights a marked deterioration in UK economic activity amid the reimplementation of stringent coronavirus guidelines.

NZD/CAD PRICE CHART: DAILY TIME FRAME (21 MAY TO 21 OCT 2020)

NZDCAD Price Chart Canadian Dollar Technical Forecast

NZD/CAD prices also jumped on Wednesday as the Kiwi pivoted higher against the Canadian Dollar. The 200-day simple moving average provided a springboard for NZD/CAD price action once again as it has multiple times this year. Positive divergence suggested by the MACD indicator points to another encouraging technical development for NZD/CAD bulls.

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The 50-day SMA might thwart a sustained advance, but surmounting this barrier of resistance could clear the way for NZD/CAD to extend higher toward its negatively-sloped trendline connecting the 31 July and 18 September swing highs. That said, the DailyFX Economic Calendar details high-impact event risk on the docket posed by the upcoming release of New Zealand inflation data, which has potential to strong-arm the direction of NZD/CAD.

— Written by Rich Dvorak, Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight





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Index on its Backfoot as Virus Cases Accelerate

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IBEX 35 Index, Covid, Economic Outlook – Talking Points:

  • IBEX 35 Index drops as Covid infections accelerate
  • Index continues to underperform regional peers
  • GDP outlook and deficit pose headwinds for economy

The Ibex 35 Index finished Wednesday’s trading session on its backfoot – down 1.67% – amid a worsening outbreak of Covid infections across the country and the broader European Union. Year to date performance for the Spanish index sits nearly -29 percent lower. This compares to the Euro Stoxx 50 index at -15 percent, and the FTSE 100 at -23 percent.

IBEX 35 Index (Daily Price Chart)

IBEX 35 Price Chart

Created with TradingView

While other EU countries are seeing rising cases, Spain continues to size an outsized rate of infections. The total case count rose above the 1 million-mark Wednesday afternoon, as Spain’s Health Ministry reported 16,973 new confirmed cases. A new round of prevention measures, including perhaps government mandated shutdowns, is likely to keep any bullish momentum from forming in the index.

Cumulative Covid-19 cases in Key European Economies

Cumulative covid cases Spain EU

Source: Our World in Data

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Spain’s budgetary problems also pose a problem for its economy – a problem that existed before the pandemic, and now exacerbated by it with the loss of economic output. Spain does plan to use just over 70 billion in grants made available from the EU recovery fund. However, it is not clear yet if Spain will accept more funding in the form of loans from the EU. The existing budgetary concerns are possibly giving Spanish policy makers concern over adding to the deficit.

IMF Economic Outlook Projections

IMF Economic Outlook

Source: IMF World Economic Outlook

Moreover, Spain faces one of the deepest economic contractions within the Euro Area according to the IMF’s latest economic outlook projections, with this year’s drop in GDP forecasted at -12.8%. However, the IMF expects Spain to outperform for 2021 with a projected 7.2% climb in growth versus France at 6.0%, and Germany at 4.2%. A value play could be argued at current prices, but the uncertainty given the virus and other factors in play would make that a highly uncertain gamble.

–Written by Thomas Westwater, Contributor for DailyFX.com

Contact and follow Thomas on Twitter @FxWestwater





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EUR/USD May Challenge 2-Year Resistance. Fiscal Talks Making Headway

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2020 Election, EUR/USD, Presidential Debate, EUR/USD Analysis, Polling Data – Talking Points

  • Third presidential debate ahead – will there be greater clarity this time around?
  • Democrats, Republicans are making progress on fiscal talks, lifting sentiment
  • EUR/USD could challenge 2-year resistance area between 1.1936 and 1.1965

13 DAYS UNTIL THE US PRESIDENTIAL ELECTION

It is officially less than two weeks until the November 3 election and polls continue to show Democratic nominee Joe Biden in the lead. However, the spread between him and incumbent President Donald Trump has somewhat narrowed after it burst open following the first presidential debate. Looking ahead, markets will be closely watching the third and final one on Thursday.

2020 US Election Polls

Chart showing 2020 election

Source: RealClearPolitics

Fiscal talks continue to dominate market mood as policymakers scramble to put a bill forward. House Speaker Nancy Pelosi’s spokesman said both sides are “closer to being able to put pen to paper to write legislation”. The big question continues to be whether another stimulus bill can be passed before the November 3 election, with issues like local government aid and liability protection for firms prolonging talks.

The third and final presidential debate is coming up in less than 36 hours, and the non-partisan Commission on Presidential Debates (CPD) has made an interesting new amendment. The organization said that while each candidate is speaking, it will mute the microphone of the other candidate to ensure each has enough time to convey their message.

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EUR/USD Analysis

EUR/USD has bounced from the previously-broken 1.1698-1.1720 support range and may now challenge 2-year resistance zone between 1.1936 and 1.1965. Capitulation could signal an underlying lack of confidence in the pair’s upside potential – at least in the short run. On the hand, breaking that multi-layered ceiling could signal the start of a bullish resumption.

EUR/USD – Daily Chart

Chart showing EUR/USD

EUR/USD chart created using TradingView

— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or@ZabelinDimitrion Twitter





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