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Is It Time to Buy The Pounded British Pound?

Is It Time to Buy The Pounded British Pound? - pound bull

The post-Brexit hangover? It's over.

 

The U.K economy is growing. This presents investors with a unique opportunity. Get long the British Pound.

 

The latest word from Great Britain is that inflation hit a two year high of 1.2% for the month of November (up from 0.9% in October). The country's third quarter GDP came in higher than expected at 0.5%.

 

This stands in stark contrast to the gloom and doom predicted in the direct aftermath of the E.U. referendum vote, in which the U.K. electorate resoundingly voted to leave the European Union. In an op-ed published in The Telegraph (one month before the June vote) Prime Minister David Cameron and Chancellor George Osborne wrote: 

 

"The shock of walking out of Europe would tip the ‎economy into reverse. This would be, for the first time in our history, a recession brought on ourselves: a DIY recession."

 

The prediction seemed plausible.

 

In the day following the E.U. referendum, London's FTSE 100 tumbled (the post-vote peak-to-trough decline was -5.6%). The U.K. 10-year bond yield hit record lows of 0.52%, in August, falling from 1.37%. The pound sunk to the lowest level since 1985. After recovering a bit, year-to-date the pound is down -13.7%.

 

With the U.K. economic outlook looking up, that presents an opportunity for investors. Here's Hedgeye CEO Keith McCullough in this morning's Early Look:

 

"We love #StrongDollar and we like the British Pound – its +0.2% vs. U.S. Dollar this morning to $1.27 (I like it long vs. Euros mind you) on a CPI print of +1.2% y/y for November versus +0.9% for October #InflationAccelerating as UK growth continues to confound the Eurozone bureaucrats."

 

Hedgeye Senior Macro analyst Darius Dale adds that our Growth Inflation Policy (GIP) Model has the U.K. economy trending in #Quad2 (growth accelerating, inflation accelerating) over the next three quarters. "As such, would expect the Bank of England to increasingly adopt a commensurately hawkish policy stance, at the margins," Dale writes. "The obvious investment implication here is to be long of the British pound – especially vis-à-vis the Euro." 

 

Institutional investors are also overwhelmingly short the GBP. Take a look at the Chart of the Day below which shows non-commercial CFTC net futures and options contracts data of institutional investor positioning across a variety of assets.

 

As you can see, investors are net short by -75,083 contracts, a significant short position versus the 1-year and 3-year averages. In short, the crowded nature of this positioning implies there's room to run once a bottom in the pound is formed. 

Bottom Line

The U.K. economy is accelerating, contrary to what London's elites predicted. That suggests it's time to buy the British pound.

 

Is It Time to Buy The Pounded British Pound? - 12.13.16 EL Chart


Should You Buy Bonds Now? Three Things To Carefully Consider

 

There’s no question about it. Investors are overwhelmingly short 10-year Treasury bonds. As one of the original authors of the bullish case for bonds (from late 2014) we’re getting a lot of questions from our subscribers on this subject. They want to know our latest thinking on the massive move in the 10-year Treasury since Election Day (from 1.85% on 11/8 to 2.49% today).

 

Are investors too bearish on bonds? Maybe…

Is now a good time to buy bonds? Maybe… the when and why matters.

 

Sure, institutional investors are net short 10-year Treasury bonds today (for more on that watch the video above). But that alone is not a reason to get long.

 

“For me to buy bonds I need to see a couple of things,” Hedgeye CEO Keith McCullough recently explained on The Macro Show.

 

  1. Timing: The longer-term trend for Treasuries is bullish. So any long position would be for a short-term trade. Stay nimble. We don’t expect GDP to slow until the first quarter of 2017 (which will be reported in April). A lot can happen between now and then.
  2. Using Our Risk Ranges: “I’d trade anything at the top end of the range,” McCullough says. The current top-end of our immediate term risk range for the 10-year Treasury is 2.55%. At that level bonds are a buy for a trade.
  3. Data Dependent?: Investors should watch Retail Sales and Industrial Production for the month of November, which will both be reported Wednesday. These data releases will provide a good barometer of where the data is headed.

More from McCullough:

“Did you think I’d say I’m data dependent? Bingo. Do I use the range? Yes. Does timing matter in between a bearish growth catalyst when you don’t yet have bearish growth data? Yes. If we do get bearish growth data will that give us a reason, at the right level, to buy bonds? Yes.”

 

In other words, we’re sitting this one out… for now.


[From The Vault] Cartoon of the Day: Gut Check

[From The Vault] Cartoon of the Day: Gut Check - trust my gut cartoon 10.14.2015  2

 

Our inimitable cartoonist Bob Rich is out of the office. While he’s away, we're going into the Hedgeye Vault and highlighting some of his best work. Click here to read more about our current financial market outlook.


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