Three top long trades tend to occur from March to April, June to July and September to November. Two short opportunities often present themselves from May to June and December to March. News of the rally in the Japanese Yen has permeated the airwaves, bandwidth and print quite a bit these days. Meanwhile the British Pound appears to have put in a nice double bottom with higher lows and higher highs off the typical March lows. Our analysis to go long the Pound back in March was timely, but it unfortunately ran away from us.
The June to July seasonal long trade is set up quite well this year. The Pound has a strong tendency to move up against the U.S. dollar from end of June through the latter part of July. In fact, in the 38-year history, entering on or about June 28, holding a long position for 16 trading days and exiting on or about July 23 has been positive 27 times for a success rate of 71.1%. Even better, this trade has been successful 6 of the past 7 years, 85.7%.
As Britain’s fiscal year begins in April the Pound often rallies from late March through April as UK firms repatriate their currency. Then, following a usual May/June correction, the Pound tends to rally again into the beginning of the U.K.’s second fiscal quarter. Cross transactions between the Pound versus the Euro currency and the Pound versus the Yen may help influence the rise in the Pound’s value relative to the U.S. dollar.
The weekly chart below depicts the British pound continuous futures contract with CurrencyShares British Pound (FXB) overlaid to illustrate how the two instruments trade in tandem. Traders have the ability to trade foreign currencies on a regulated marketplace such as the CME Group’s futures and options exchanges that provide more electronic access than ETFs afford. Investors who require less leverage will find the FXB an adequate trading vehicle. Either way, the seasonal tendency is quite strong for the pound to move up in this time frame.
By Jeffrey A Hirsch