the gestalt shift

Where will the Pound go? GBP/USD trading strategy using Gold/Oil ratio

Where will the Pound go? The single unit climbed above 1.60 and now there are fears that it has gone too far too fast. If there’s one thing that ever remains the same it’s market pundits and analysts who have to ascribe an overbought or oversold rating on something simply because it has moved. This will not get you far in trading.

As successful macro traders we have to keep asking ourselves, “what has brought price to where it is now?” If an imbalance exists then we have to look for a catalyst (read, Gestalt Shift) to start entering trades in the other direction. The market had been fleeing to the safety of the dollar since before march, but then a Gestalt Shift developed as the market developed a perception of economic recovery. This was signaled long before currencies made their move by the Gold/Oil ratio. The Gold/Oil ratio is a good way to look at the value of the two commodities because the US dollar factor is ommitted. Gold is usually a good unit of measure for other assets due to the fact that it has true value (unlike currencies), whereas oil usually tracks global growth and demand. The plot of the Gold/Oil ratio over the last year shows that it reached a turning point toward an indication of global recovery long before equities and currencies caught on. This should have been another clue in addition to my article on the Pound imbalance.

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Gold/Oil ratio 2008-2009 [source: Bloomberg

 Traders should look for this ratio to increase again before establishing a short bias on the GBP/USD pair. I’ve created a table/graphic below to explain what factors are limiting the Pound’s and the Euro’s upside as well as supporting their strength right now. One must not be swayed by the ebb and flow of news releases, but rather keep an eye out for major imbalances. Although the Pound could retrace quite a bit (nobody knows), the bias should be long considering there is no striking imbalance that would suggest money should start flowing into the dollar like before. The media is talking about the Fed hiking rates sooner rather than later, but the truth is they have their hands tied (especially with China holding the bulk of US Treasuries) and it’s too early to tell whether we have really have a turnaround in the US. From a probabilistic standpoint, the pound has a better chance of getting more upside while the Euro is more likely to range. As always– These are likelihoods, and do not need to be correct to make money.  

Pound and Euro driving forces

Tuesday, June 9th, 2009, by admin and is filed under "Strategy ". You can leave a response here, or send a Trackback from your own site.