After reaching a four month high in July, the Pound began to plummet as traders commenced the overall Dollar buying spree. With signs of life giving some optimism to those long the Sterling in mid-September, the dreams of resurgence were quickly dashed. Greenback buyers hoarded their beloved North American currency as legislative rescue talks began to murmur in the halls of congress and in the financial press. With the Dollar becoming a safe-haven currency for those seeking the protection of the US government, a two week Cable sell off ensued. But over the past three days as G7 leaders met in an effort to coordinate a strategic global rescue plan, financial volatility simmered, ushering those safe-haven Dollar buyers out the door and towards other currencies. Now GBPUSD currently finds itself in its second consecutive daily rally with an end in sight. As Bank of England continues to feel the brunt of failing institutions such as Royal Bank of Scotland, credit loosening may come to the forefront of the central bank’s agenda. In fact bond yield forecasts call on Mervyn King to slash rates by an additional 75bp through Q3 of 2009. While the same forecasts call for a 25bp rate cut at the Fed’s late-October meeting, this move has probably been priced into the exchange rate. Nonetheless, with the U.K./U.S. yield-gap forecasted, but not fully anticipated, to favor the Dollar, the pair will continue to sell off for the foreseeable future. With the overall economic perspective in favor of the Dollar, the technical outlook opens the door for a short-term retracement upward. After oscillating in a clean descending corridor since June of 2008, GBPUSD has found itself above downward channel resistance and resting along the 38.2% Fib level of the 09/25/08-10/10/08 sell off. Prior to continuing the downward theme, a continued corrective retracement upward would target a 50.0% Fib resistance at 1.7717. Hedging Strategy Currency Pair: GBPUSD Long Term Bias: Bearish Long Term Position: Holding Short Short Term Bias: Bullish Short Term Position: Buy above 1.7492, Target 1.7717, Stop-Loss below 1.7316 Traders looking to protect their existing short GBPUSD position or enter long at a favorable price may consider a hedge long GBPUSD above 1.7492 with a target at 1.7717. Once the profit target is hit, we expect the bearish trend to resume. We will maintain a stop-loss on our hedge position should GBPUSD break to the downside prior to the target being hit. We will set the stop-loss below 1.7316.
Created Using Bloomberg – Prepared by Ilya Spivak and Luis Gil When should I use the hedging feature? Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods – sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return. The hedging feature is currently available on all accounts using FXCM’s No Dealing Desk service. For more information on FXCM hedging strategies please visit http://www.fxcm.com/hedging.jsp. To reach Luis with comments regarding this or other articles he has authored, please email him at lgil at fxcm dot com.