The EUR/GBP cross is close to the heart of many UK residents who worry constantly about the tourist exchange rate, especially when a holiday on the Continent looms. Should I exchange now or wait for a possibly better rate? And where can I get the best rate?
My advice, if asked, is to get them now and the online bureaus usually offer the best rates. That is because when an exchange of only hundreds of pounds is involved, the difference in rates is hardly life-changing. It may just pay for a beer in a Scandinavian country.
But as a trader, that is definitely not the advice I offer my VIP Traders Club members! No, we are trading in many thousands of pounds on margin – and at the currency exchange rate where a few tens of pips can be significant.
We have just completed a winning campaign in EUR/GBP that went against conventional wisdom, as many of my big trades do. Here is how I did it.
When I advised a long trade in EUR/GBP back in May, this was a highly contrary stance. Back then, it was common knowledge that the euro was doomed as eurozone policy interest rates were being held at rock bottom and many EZ sovereign bonds had been trading at the unheard-of negative yields in 2016 – including the pivotal German 10-yr.
Also, GDP of the eurozone was weak and if you were trading on the fundamentals, you would have no reason whatever to feel bullish on the euro.
As for sterling, GDP numbers in the Spring were looking relatively healthy – and among the best in the OECD. On that basis, the market was not so down on sterling. Thus, the prevailing opinion was that EUR/GBP would continue to decline. That was the conventional view that most economists would support.
But a funny thing happened on the way to that bear market. The cross rate started to rally! Surprise, surprise. This was the position at the time:
The big rally phase got started in the summer of 2015 at around the 70 cent level as sterling was relatively strong especially against the dollar. And the bull run into the spike Sterling ‘Fat Finger Flash Crash’ high of 7 October was a pretty clear five up. The final fifth was a typical extended fifth which is common in currency charts.
From that October high, the market declined and over the next few months endured a difficult period of consolidation which was supported by the support at the 83 cent level. Despite several attempts to break that shelf of support (all the while, the ‘experts’ were confidently predicting much lower prices), the support held and when a major pink trendline was overcome, that was the signal I needed to take a contrary long position at the 84.50 cent area.
Here is the daily
Of course, in May, I did not have a firm idea of the wave labels I show here. All I knew was that the market appeared ready to confound the experts again and push higher in a B wave. But as the market continued to rally, I was able to draw in the lovely blue tramlines with the upper one being especially important. That is because as the market bumped into it in August, I knew a hit would likely signal a high – and a good place to take profits.
I have marked last week’s high as red wave 3 – and it could legitimately be a three (leading to a four down and a final five up). But the alternate scenario is that it is a wave 5 high and the next big move is to be down in purple wave C. C waves are usually devastating – and I did not want to hang around on the wrong side of that!
That is why we banked profits at around the 92.50 area for a very tidy profit of about 8 cents. Not bad for a trade that shouldn’t have worked based on the fundamentals.
But we know that the market does not follow the news – that puts the cart before the horse. And last week, lo and behold, the MSM gave me a clear sell signal when these articles appeared this week:
Is pound sterling about to hit parity with the euro? Cityam
Is the pound sterling heading for parity with the euro?; Telegraph
There’s no stopping the euro now – how high can it go? Poundsterlinglive
Goldman sees euro-dollar parity in September: Marketwatch
Pound will fall near to parity with dollar and euro – Deutsche Bank: Forbes
….and there are plenty more in the same vein.
This is a magnificent demonstration of my MSM Headline Indicator at work. Recall that when the MSM heavily features a market trend, that trend is over or nearly so. You can take that one to the bank (as we just did!).
The last two quotes are prime examples of Groupthink (a phenomenon beautifully noted by George Orwell in his famous novel 1984).
That trade lasted about three months and captured the significant move of eight cents. That is a typical swing trade I am always aiming for.
To recap: In May, the MSM were heavily bearish on EUR/USD and this week, they suddenly noted the market had been in a very strong and lengthy rally and were suddenly converted to rabid bulls. And that is how markets work, folks. Bull markets start with deep levels of pessimism and end with manic levels of optimism. Period.
Traders who can stand back and recognise this process populate the thin ranks of very successful traders. Can you do that?
Why aren’t stocks crashing? Ask Dr Copper.
I read many articles that are totally amazed the bull run in US stocks keeps setting new highs (in Nasdaq) in true Duracell bunny fashion. They point to all the negatives from the near record high valuations (CAPE of the S&P is around the level at the 1929 high!), the high level of margin debt, the heated-up North Korean nuclear threat, disarray in the White House – and so on.
But if the fundamentals ruled the markets, they would not be riding so high, surely. My loyal readers know that it is sentiment that drives the markets – and confidence in the future is high. As I pointed out last time, the future is almost here with self-driving vehicles revving up already. Here is another sup[er-bullish piece on the future of car ownership with all the savings that implies that could boost consumer spending – and higher stock prices.
My almost flippant rebuttal to self-driving cars is this: Will boy racers go extinct?
One of the factors that convinced me that stocks were not yet ready to start crashing yet was the performance of the copper market. Here is the chart of the red metal:
This is one of our major ongoing trades and I believe we are in wave 3 of 5 – a very strong Elliott wave. Not much weakness there! It is said that copper has a PhD in Economics since its price trends often foretell the state of the global economy, whereas human PhDs often fail to foretell trend changes.
I have a target at around the 32 – 33 cent level and will re-assess. I have a feeling that will coincide with a high in the Dow/S&P. We shall see.
Incidentally, the non-farms yesterday was ‘weak’ according to the MSM which they noted implied less pressure on the Fed to raise policy interest rates. If that was so, why did T-Bonds (my very favourite trading market) collapse with yields moving much higher? They had no answer to that.
Interested in the Tulip Mania?
I note there is a new movie out about the great Dutch tulip mania of the 17th century. This Bloomberg review is interesting but right at the start, he states: “Markets are governed by two things: math and story.” Ouch! And that little sentence encapsulates the wrong-headed way the MSM views how markets work.
But is the appearance of this movie now of a long-gone financial mania an omen of what will happen to Bitcoin?