Prime Minister May triggered Article 50 on the 29th of May, officially notifying the European Union of the United Kingdom’s intent to leave the union and formally starting the Brexit process. Since the majority of respondents voted to leave the European Union in the June 2016 referendum, there have been some significant moves in foreign exchange and equity markets, though not quite the risk-off chaos that many feared. Despite the lack of full-blown crisis, significant moves mean significant opportunities – so where to invest after Brexit?
Where to Invest After Brexit
Whether you’ve been trading GBPUSD or the crosses, the pickup in volatility in the British Pound since the Brexit vote, has provided some stunning trading and investment opportunities and will likely continue to do so.
GBPUSD fell over 3000 pips (20%) peak to trough, but the decline seems on-pause for now: the pair is currently trading around 1.25, up more than 4% from the lows sub-1.2. Pair is consolidating sideways in a wedge formation, putting in a lower high on the 24th of March above 1.26, after carving a higher low earlier in the month above 1.21:
GBPUSD Wedge Formation at Vantage FX
With inflation in the UK on the rise and worries of blowing further air into the London housing bubble, many are arguing that the BOE will not cut rates any further and the next move from the BOE will be a hike. Proponents of this view will be looking to buy the Pound on a break above the wedge top (1.26 and falling), or buy into the wedge bottom (1.215 and counting) on any interim weakness, anticipating the start of a tightening cycle and a very big move towards former support in the 1.4 region.
Dubious of the Bank of England’s intent to hike? Some would argue that the English central bank will tolerate a temporary overshoot of their inflation target, in order to ensure robust growth post-Brexit. A reinvigorated QE program and the initial cut lend weight to this view. Traders and investors of this view will be looking to sell any strength on the pound, anticipating a violent move lower towards 1.1, following a break of wedge support.
No matter what your view is for the pound, there are going to be some stunning investment opportunities and even a range bound scenario could be very profitable with such a large range.
If the past decade has taught us anything, it is that stock market indices love quantitative easing. Investors can’t get enough of it. Period throw a rate cut and a 20% decline in the Pound into the mix and is it any wonder investors worldwide are falling head over heels to buy the FTSE?
The index gapped 9% lower in the immediate aftermath of the brexit vote, but finished the day up nearly 5%, with a strong close at above 6000 from 5725 lows. This was a sign of things to come, with index proceeding to rally another 1200 points over the coming months. Whether you think the BOE will cut or hike next is borderline irrelevant – QE is here to stay until we hear otherwise.
The index recently set a new all time high (again) just shy of the 7500 psychological level and appears to be accumulating below there now, after finding support above 7250:
FTSE100 CFD Bull Market at Vantage FX
Buying dips and bullish breaks on the FTSE going forward seems like a solid (though admittedly basic) investment strategy going forward.
The US Dollar
After a good-run after the Brexit vote and micro rally following the Federal Open Market Committee’s initial second hike in December 2016, the US dollar’s performance can be described as lacklustre at best. Egged on by dovish Yellen, the dollar sold off across the board following the FOMC’s third hike in March, despite the market finally agreeing on two more hikes in 2017.
Contrarians have done well playing the USD to the downside, but at some point the reality of rate differentials will have to gain sway. The official cash rate in the US is already much higher than its G7 counterparts; Japan, the European Union (Italy, France, Germany), the United Kingdom and Canada, and looks set to be on par with, if not above Australia’s by the end of 2017. It is very hard to see the US dollar remaining depressed for long in this against this back drop of widening rate and yield differentials.
Rather than a straight play on the Dollar Index, we think it is best to play the USD against the QE currencies and specifically the Yen. As discussed earlier, Cable could go either way and the Euro has been very stubborn below 1.1, with calls for parity being a consistent disappointment. Though a majority of polled Bloomberg economists saw the BOJ tapering in some form this year, we have not heard anything of the sort from the Bank itself and find these predictions extremely premature.
USDJPY put in a lower high after the Fed’s second hike in December, but this was at a key, weekly resistance confluence-zone and following a stunning 1800 pip / 6 week rally. We see recent weakness as corrective rather than a reversal lower, and month-end strength in March seems to confirm this:
USDJPY Correction at Vantage FX
We are looking for a return to 118/19 over the coming months and a re-test of the all time highs above 125 before the end of 2017. In the event that we have this wrong and the pair is heading lower, expect the BOJ to defend 100 aggressively.
These are just some of the trades the Vantage FX team are keeping an eye on in 2017 and beyond. The Brexit vote has passed, Article 50 has been triggered and the UK is set to leave the European Union in 2019. Irrespective of your views regarding the politics and interest rate paths, I think we can all agree that we are going to see a lot more exciting trading and investment opportunities!
- Oscar Goullet
Article provided by Vantage FX, Regulated Australian Forex Broker.