GBPCHF Trade Idea (Jan, 2021) Sterling Sellers Back?!

What's been going on in the UK? Well, to no surprise there's been a "highly infectious variant" of the original COVID-19 variant. One of the interest facts about the new variant was that it's been predominantly with 20 year olds which are spreading faster to older people.

What makes this very interesting in the financial markets is if this will have an impact on existing vaccine bullish sentiment. Will Pharmaceutical companies be able to react with speed or not that is the question. Most the UK has been put into high "tiers" which mean many businesses are closed and people aren't allowed to socialise. It's basically... a lockdown without being in a lockdown.

Overall, there's been interesting data released over December which can be seen below in our top level overview.

Logikfx - Top Level Fundamental Overview

The top level fundamental overview is our quick summary of what's going on with the fundamentals behind GBPCHF. On a domestic level the currency strength meter is saying that GBPCHF should be shorting. That's why it's green on the overview. However, the two factors that are currently not agreeing with the short side bias is the GDP Differentials and the Imports/ Exports analysis.

The international trade (import/ export analysis) is quite a big factor which needs to be considered in the final decision. Since it's not agreeing with the bias overall, we need to account for the potential opposite view it's saying. But, the overall consensus is saying that a GBPCHF downtrend looks likely.

Macro Currency Strength Meter - Logikfx

The Logikfx Macro Currency Strength Meter throughout December showed interesting diverging signals in domestic fundamental strength. What we've seen is a fundamental divergence between GBP and CHF. The GBP has started to weaken between 26/12/20 and 02/01/21 which gives us a fundamental bias to short GBPCHF! The negative macro score for GBP being -20 and CHF being +17 it's a great indicator of a downside movement brewing.

GDP Differential Indicator

Overall, the GDP Differentials were one of the factors disagreeing with our short side move. This is because of the expected growth in 2021 for the UK in comparison to Switzerland. This change has created a huge 6.8% gap from 2020 to 2021 which is bullish on the GBP. So we need to watch out for the GDP data to see if there's any conflicting information or new data to suggest a potential weakness in the forecast.

GBPCHF vs BRENT

Oil prices also known as BRENT for the UK is a commodity which is traded quite a lot but isn't really mentioned a lot. Unlike the WTI which is the crude oil prices of the American Oil the BRENT oil prices is used to price about 2/3 of internationally trade oil. It comes from the North Sea above the UK and around the top side of Europe. The European oil prices you could say.

The reason the the import export analysis was against the idea was mainly because of a few commodities/ companies were suggesting the opposite conviction. One of them being BRENT which saw growth in prices, with a positive correlation this was going against our short side bias. What I'd be watching out for in January is any type of downside movements, especially with the ongoing lockdowns being introduced and speculation of another national lockdown.

GBPCHF vs GOLD

Gold is another globally exported commodity which Switzerland actually buy a lot of, especially from the UK. It accounts for nearly 60% UK exports to Switzerland! Overall, gold prices saw a huge push over the past few years. After a small dip two months ago we saw prices start to climb again. Since there's a negative correlation between GBPCHF and Gold the growth in Gold actually shows a potential downside move. This part of the export analysis actually agrees with our short idea from the strength meter!

GBPCHF vs Rolls Royce

Rolls Royce is one of the UK's biggest companies which manufactures aerospace parts, turbines etc. It has a 54% positive correlation with GBPCHF which means that over half the time as Rolls Royce prices go down GBPCHF follows and vice versa. The growth in RR goes against our short side bias which is why our overall export analysis shows a red signal, this is because the overall consensus was showing bullish signs from Oil and RR. Gold was the only commodity that agreed which is okay in the end but we can't be biased in the overall analysis.

Interest Rate Differentials

The interest rates again are one of the main economic/ monetary indicators of currency value. We can see over the past 6 years that the interest rate differential line is quite similar to the price chart of GBPCHF. The differentials as they fall you can see GBP take a hit too. When the differentials fall, we also see GBP follow suit. Since the most recent data we've seen interest rates stay the same but they dipped hard at the start of the pandemic. We've also seen speculation that the Bank of England may look to negative interest rates which would see GBP fall heavily.

Domestic Stock Market Analysis (FTSE100)

The domestic stock market analysis was showing very bearish signals. We can see that since March 2020 the stock market in the UK has not recovered well in comparison to other economies. This is a bearish pull on the GBP moving into 2021. It's showing that the UK wealth and pensions are becoming worth so much less in comparison to Switzerland, this forces investors to hedge their assets in the FTSE by selling GBPCHF to protect against deflation. It's still a 20% fall since pre-pandemic highs, if those highs don't get reached then it's very unlikely we'll have a bullish outlook anytime soon.

Commitment of Traders Report - Open Interest Analysis

Overall, the COT sentiment on the 21/12/2020 looked in favour of the short side moves with GBP open interest in a neutral spot and CHF increasing open interest for hedge funds. This is a bearish sign of sentiment and shows that we won't be trading against the markets. If the COT updates on Monday show otherwise then we'll need to update the idea, this is because since XMAS eve the CFTC have had delays in updating their COT positions.

Price Trends

Overall, the market seems to be in a downtrend over the past few years. The GBP has yet to recover fully against the CHF. We're running into a weekly resistance level now which has seen prices fall in the past as the sellers took control. There's potential in this area that selling power is strong. At this point on in the analysis feel free to use any type of technical analysis in conjunction with fundamentals.

My personal outlook either this resistance level will hold and see sellers come through or we'll have one final bullish run to the 1.26 level. Be cautious on this one since export analysis wasn't fully there, think for yourself and don't just read analysis and enter trades. Think for yourself and use this analysis as an addition to your own analysis. - Matty, Logikfx

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