1.25? 1.20? Parity?
It's always dreamy to think about the big picture and to imagine how the market will move in the long-term. But I often would suggest you leave that to economists and analysts. As traders, we trade what is in front of us and what opportunities present itself at the time afforded to us.
Yes, there are trades which stretch longer but essentially in trading nothing is as straightforward as it would seem. The hot topic on the pound now is all about what Brexit outcome is to be expected? Deal or no deal?
Credit Agricole seems to believe that a no-deal scenario would see cable fall to 1.20 in what they call a "long-term fair value under a very hard Brexit". Alternatively, they see it moving to 1.39 or higher in the opposite case.
Meanwhile, Commerzbank believes that a 10% decline in the pound would be the "minimum" on a trade-weighted basis although noting that the risk of a no-deal outcome has only increased "marginally" following UK trade minister Fox's comments.
More on those calls here.
Some thoughts on trading calls like these:
It's easy to imagine and call a level for which direction a currency pair may go in case of a certain event, but it's a whole other thing to trade it to that level. If you're afforded capital and wide stops then kudos, life's a whole lot easier for you but not all retail traders share that same luxury.
And that is why I will emphasise on risk management more than anything else. It's easy to get hooked on an idea and then execute it because of the reward it may present. And often times we ignore the risks associated with it until it starts to balloon up.
Not to stray off-topic, but I am never a big fan of these macro picture trades. The only one which managed to convince me of otherwise was the EUR/CHF trade to 1.20. And even then, there has been a lot of scaling out of positions along the way as well as re-entries. Not to mention some later entries being stopped out too.
After all, that is part and parcel of trading. If you're looking to buy and hold, you're better off investing instead. So, even if my bias is towards further weakness in cable at the moment, should the charts and/or fundamentals present an opportunity to the other side, I'll gladly take it. I mean who wants to pass up an opportunity to make money, right?
Anyway, back to the topic of a no-deal Brexit outcome, there's just so much unknown elements at play that it makes it impossible for traders to even envisage what to price in. One day it could be all doom and gloom, the next it could be butterflies and sunshine. Whether that means cable is heading to 1.25 or 1.20, your guess is as good as mine. But I'd be much happier trading what I see in front of me than go chasing after a leprechaun on the other side of the rainbow.
