After the divided politicians of the United Kingdom managed to postpone Brexit to October 31, 2019 from March 29, 2019, I assumed the British pound (FXB) would take a break from wild and sudden gyrations. I was wrong.
On Thursday, local elections plunged the Conservative party (the Tories) into a resounding defeat that most benefited the Liberal Democrats. The market chose to interpret this development as pound-positive, and the British pound surged against all major currencies right into the close of trading for the week. The presiding narrative is that the country is fed up with the inability of the Tories and the Labour party to work out a Brexit plan; a surging Liberal Democrat party will help pave the way forward. I cannot make sense of this narrative and just see this event as yet one more maddening stumbling block for the United Kingdom in the madness that is Brexit. Now there are more people with power to complicate the calculus of winners and losers.
I am inclined to fade this rally in the British pound (FXB) except that I am already short. In what has become a fortuitous setup, I have spent much of this year sitting on a short GBP/JPY position while accumulating longs on the British pound with long GBP/USD and short EUR/GBP whenever the pound fell into weakness. I have taken profits in these positions into the next rally. If the momentum continued, I would buy higher and sell higher in smaller amounts. This strategy has worked long enough for me to give it a name: the “organized chaos” trade.
The Brexit action on the ground is true chaos with the British pound jerking upward and downward on the slightest news. However, taking a step back reveals a more organized pattern in the trading that pays the patient. For example, against the U.S. dollar (DXY), the British pound bounced very consistently off its 200-day moving average (DMA) from February to mid-April. The 200DMA breakdown in late April was brief and setup the current rush to the pound; I am guessing too many traders shorted the pound into the 200DMA breakdown. In January, a 50DMA breakout preceded a strong run into and through 200DMA resistance with strengthening financial markets as a tailwind before a fresh test of 50DMA support in February. These reliable longer-term moving averages created organized trading conditions. The chaos of the moment-to-moment Brexit drama is well contained within the daily patterns.
While GBP/USD provided reliable trades going long the pound, EUR/GBP, the euro versus the British pound, has had more quirks thanks to the rapid weakening of the euro (FXE). While EUR/GBP stayed within a general trading range, moving averages have not played a major roll in tracking the currency pair. AS a result, I had fewer ideal set-ups to short EUR/GBP.
I spent most of Friday incredulously monitoring the persistent surge in the British pound. EUR/GBP in particular looks extremely over-stretched closing well below its lower Bollinger Band (BB). If I decide to try to fade the pound’s recent surge, long EUR/GBP would be my first choice.
I cannot get too excited about fading the pound because of my baseline short GBP/JPY. I hold onto this position because I ultimately expect either a fresh surge in the Japanese yen (FXY) from renewed weakness in financial markets and/or a rapid, Brexit-driven decline in the British pound. I want to have a short GBP/JPY in place ahead of such an event. The organized chaos of GBP/JPY has facilitated this positioning: the pair has traded in a well-behaved pattern of bouncing off 200DMA support and stopping short of the highs from last October and November.
Bracing for an End to Organized Chaos
The currency market rarely offers consistency, so I am well aware that this organized chaos trade has to end at some point and perhaps well ahead of the latest Brexit deadline. Fortunately, I have plenty of cushion on my short GBP/JPY, so I plan to target a runway to October until proven otherwise. Along the way, I am content rolling in and out of smaller long pound positions. In the immediate days, I will be looking to jump into long pound positions on the next bout of weakness.
Be careful out there!
Full disclosure: short GBP/JPY