Conclusion: While U.K. housing data points are rolling over, they are still more positive than in the United States.  This fact combined with an increased likelihood that interest rates in the U.K. increase sooner than in the U.S., supports our long Pound, short U.S. Dollar position.

 

Position: Long Pound (FXB)

 

Below are a few charts we keep front and center to track moves in the UK housing market: the UK’s Hometrack Survey and British Bankers Association Mortgage data.  In both we’ve seen a marked turn in housing since early 2010, a downward move we’d expect to continue over the intermediate term TREND due to significant oversupply issues (2004-7 period) and continued weak demand, reflected in buyer/consumer economic hesitance alongside new waves of austerity measures (higher VAT, government job and wage cuts) that should pinch the consumer and lead to tame economic growth out on the curve (see charts below).

UK Housing in the Woods - mh1

UK Housing in the Woods - mh2

UK Housing in the Woods - mh3

In context, we believe that the weakness in the US’s housing market could be a far greater driver in capital and currency market moves over the next 3 months (both locally and globally). To be clear, our bullish call on the Pound via the etf FXB in the Hedgeye Portfolio is a relative one based on our conviction for weakness in the USD over the intermediate term TREND. As a point to note, we’re still seeing inflation signals in the UK, which may also be fueling the move in the GBP-USD, which is up +2.75% in the last month and +6.04% in the last three months.  CPI in the UK has held above the 3% level (year-over-year) each month in 2010, while US CPI has trended lower this year, currently at 1.1% in August Y/Y.

Increased inflation in the United Kingdom is likely to lead to rates moving higher sooner than in the United States where the primary concern from Federal Reserve officials remains deflation. Further, an increase in interest rates in the United Kingdom will continue to support an appreciation in the Pound versus the U.S. dollar.

Our TREND level of support for the FTSE is 5,260. Our TRADE and TREND levels of support for the GBP-USD are $1.55 and $1.52, respectively (see chart below).

Matthew Hedrick

Analyst

UK Housing in the Woods - mh4