Morning Brief – Is this a test?

Morning Brief – Is this a test?

Tue 3 Sep 2019

Is this a test?


2016; 2017; 2019. These three years have now all seen cable (nickname for currency pair GBPUSD) test its post-referendum low. Building a hyper price-sensitive area around the 1.20 mark, the pair has flirted with this low five times in these three years. This time, the direct risks levied against the Pound with BoJo in power are bigger than the uncertainty risks present in the two years after the referendum (2016; 2017). But the question for the mother of all Pound trades will be “are the risks on balance large enough to force the pair to break its 4-times reinforced resistance?” You need to decide for yourself the balance of risks but this brief will guide you through how to categorise them. 


Block the previous threats to GBPUSD’s post millennium low into three different categories of uncertainty: 1) Known Knowns; 2) Known Unknowns; 3) Unknown Unknowns. Now, read this too many times and you’ll be scratching your head and asking a colleague, neighbour or friend whether the word Known is starting to look odd to them. But bear with and read the above as follows 1) I know what the problem is and I know what’s going to happen; 2) I know that I don’t know what’s going to happen; 3) I’m unaware of something I don’t know about. Now 3s, the unknown unknowns, aren’t an exercise of ignorance but rather are your unintended consequences or freak incidents. An investor will have perceived the risk of all three of these uncertainties and used this information to inform their decision to either buy and hold the Pound or sell it and attempt to profit from its demise. 


In 2016, we had a scenario populated by unknown unknowns; Article 50 had not been triggered, we didn’t really know what to worry about: elections; negotiations; referenda. We were aware of the issues and destination but remained (not so) blissfully unaware of how we might get there, the issues that would arise along the way and what we’d find once we arrived. So, the Pound sold off in an endeavour to price in the fear that things could go wrong. Put differently, the uncertain prospective holder of the Pound demanded a premium to sell it to you. Within that premium, an arbitrary probability to account for the many unknown unknowns, about scenarios we feared we may one day fear, demanded that self-preservation dictate we don’t hold the Pound. It therefore falls but, crucially, found bedrock around the 1.20 level.


2019 is a different kettle of fish: Article 50 has been invoked and has held for well over two years. We have a Prime Minister that tells us we will leave on the 31st October because he will not be requesting an extension from the EU under any circumstances. With the change of leadership and in this currency slide, the nature of threats are overwhelmingly more known. Even risks to the divorce deal are overwhelmingly known. So to analyse whether the pair will break this historic level you should ask yourself this: is the state of play as we can easily read it today worse than the panic sell offs in 2016/2017. If yes, then your conviction would be that the pair should head straight to jail, do not pass go, do not collect £200. However, particularly given the risks in parliament today that might force Johnson’s hand towards a general election, if you think things aren’t as bad as they could have been, you favour a fifth bounce off of this level and a rally higher for the Pound. 




Discussion and Analysis by Charles Porter

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