We all know the title of this post is an expression of disdain, much like what people feel when you mention the idea of the British Sterling as an investment. Recent Brexit, European economic collapse and Goldman Sachs doomsday free-fall concerns immediately scare investors away. But, looking at the weight of the evidence a contrarian might consider the charts, sentiment and how “smart money” is currently positioned as a sign in favor of a forthcoming rally in the currency. Let’s take a look
In my first chart. a weekly look at the British Pound ETF, FXB, you can see it formed a double bottom with positive (bullish) momentum divergence. I need to point out that there is not just one but two divergences that have formed across two different time frames. These occurred after the huge, 2 consecutive week Brexit capitulatory selloff in June. This hinted most everyone who wanted to sell already had, leaving only buyers. Aiding the bullish case, last week closed with a bullish engulfing candle hinting of further upside.
On the daily chart below, the divergences become more obvious as was the massive selling volume in the lower pane, well in excess of 10 times its norm. Since the first tag of the bottom, price has formed a nice sideways consolidation channel which, if broken, should indicate the direction of the next leg of the pound’s journey. Also, while hard to see because of my small annotations, August 15 was a one day failed breakdown below the lower support line followed by a gap higher. While reasonably infrequent, when these event occur I immediately think back to one the investing adages we should never forget…” from false breaks comes big moves in the other direction”.
Finally I like to look at COT (Commitment of Traders) data. Without boring you with all the details the Commodity Futures Trading Commission (CFTC) releases a COT Report which aggregates all the futures positions of every major player in the futures markets. The data is broken down into three sections and what is important to investors is how the “Commercial” traders are positioned. You see these are the whales, the guys with the big bucks and while not always right I have learned the hard way you DON’T want to be positioned (for very long) on the opposite side of them. In the chart below for the British pound, the pane is the price movement of the pound, the second pane is the commercial trader’ position, the third pane is the large trader and the last is the small speculator. While the chart includes only 5 years worth of data, I went back through more than 25-years and this is THE largest long position in the British pound. EVER! The smart money is positioned for a rally in the pound. How about you?
I know there are doubters as I can be included on that list. But as investors some of the best returns are those which no one expects which is why we need to remove all biases and keep our minds open to all opportunities. The weight of the evidence strongly suggests a powerful rally in the British pound is likely in our future. The downside risk is limited as an exit below the failed breakout low makes for a compelling risk to reward ratio on this opportunity