Brexit-Based Euro Trade
Featuring Joseph Trevisani
Published on: May 21st, 2019 • Duration: 15 minutesJoseph Trevisani, senior analyst at FXStreet, returns to Real Vision to explain the ongoing Brexit situation and to outline a bullish trade on the euro. He dives into the politics, considers threats to his thesis, and notes key levels for the currency pair, in this interview with Justine Underhill. Filmed on May 20, 2019.
JUSTINE UNDERHILL: Welcome to Real Vision's Trade Ideas. Today, we're sitting down with Joseph Trevisani, Senior Analyst at FXStreet. Great to have you back here.
JOSEPH TREVISANI: Thank you. It's nice to be here.
JUSTINE UNDERHILL: So, you've been on about half a dozen times in the past year going short the Euro. And now you're here to go long the Euro, what in the world changed?
JOSEPH TREVISANI: I could say I matured, but that probably wouldn't be a very good answer. I'm only going long the Euro against a particular currency, that would be the Sterling. As far as going long the Euro against the dollar, that's not something I would do. And that's not something I'd recommend. I still think that the dollar is overall going to strengthen as we go through this year, and probably into next year.
But right now, even though there is a lot of problems on both sides of the channel, or Lamar, as the French prefer to call it, the Sterling and Britain has much more immediate and more serious problems, of course, relating to Brexit and now, relating to the entire political system, if you will. If not system, but at least a political layout in parliament right now. They are heading towards a new prime minister, and all of the turmoil and the indecisions going to go around that is going to be bad for the Sterling.
JUSTINE UNDERHILL: Now, the Euro has risen sharply against the pound in recent weeks. Do you still see it being a good time to get into the Euro?
JOSEPH TREVISANI: Not yet. What has happened in the past two weeks is that the Sterling and relative to the Euro, so the Sterling has taken a very large hit because of the political turmoil in Britain, because nobody really seems to know what's going on or how to get out of it. And the best they're coming up with now is going to be a new prime minister. May has said that she'll resign but she hasn't given a date. So, that's the issue. But that has come up very, very quickly. In other words, that the Euro has gotten much stronger against the Sterling very quickly in the past two weeks.
Normally, when I put on a position, I look at the market, I look at a market entry, where the market is right now based on what you've seen in the past couple of days, it has moved too much. But this case, because of the rapid change, I think that the cross itself, the Euro-Sterling, is probably due for a bit of a pullback, and that's what I'm looking for before I get in. But intermediate term and long-term, up to three months, the Euro is going to strengthen against the pound. It's probably more accurate and more informative to say that the Sterling is going to weaken against the Euro.
JUSTINE UNDERHILL: Okay. Before we get into your levels, could you give us a little bit of background as to exactly what's been going on with Brexit? And how you see that playing out?
JOSEPH TREVISANI: That's a good question. And it's a difficult question to answer. And we've all been following this because it's a fascinating story. It is very much democracy in front in the open. And the British have an excellent channel for watching the debates live in parliament, which I've done many. I find it fascinating. Not everybody does.
The real problem in Britain is there isn't a majority, a substantial majority for either choice. The vote itself, besides being a huge surprise, was very close. Nevertheless, exit won but the parliament members by and large, and certainly much of the- I won't call it governing elites, but the media, academic and other people who refer to themselves. Or maybe they don't, but somebody refers to them as the elites or pretty much uniformly against- not completely against leaving the EU, they are the remainders. And so, they have more sway than would be expected except for the fact that they lost the vote.
So, this entire debate is being played out on a knife's edge as far as politics and also public opinion. So, they haven't come to a conclusion. And that's the main reason, because you have an effectively evenly divided country. Nevertheless, the political establishment has said that they will honor this vote. But they don't really want to. And so, they haven't been able to get to a point where they can agree on anything to affect the vote.
And so, the issues there are accurate reflection of the split in the electorate. And so, that makes it for a very drawn out and almost impossible political process. So, that has been the biggest issue in Britain. And it's not one which is solved. And it's not one that can be solved by a prime minister who is essentially trying to temporize and placate and find an agreeable middle path. Because with something as divisive as this issue, there really isn't a middle path. I've long said that once Britain leaves, it doesn't really matter a great deal what terms they leave on because at that point, the two parties will start to grow apart. Their systems will start to separate. But that's not the biggest theme May has taken.
So, the entire issue has one which is been damaging to the pound from strictly a currency point of view. So, now we are looking at a new prime minister. The only way I think you can get through this issue is to take a more forceful view, whatever it is. If it's going to be a conservative Prime Minister, assuming that it's Boris Johnson who is apparently right of first refusal here. Then the approach he would seems to me would have to take would be a harder approach to the departure. Even as far perhaps as a no-deal Brexit of leaving without a negotiated agreement.
What position will that be for parliament, which has already voted that they won't leave under those conditions? I'm not really sure. And I think anybody else is either. All of this is a huge issue for the pound. And as long as it plays out, the pressure remains on the pound, and that's the primary reason I'm choosing this.
JUSTINE UNDERHILL: Okay. So, as long as there is uncertainty, you think that that's going to be positive for the Euro and negative for the pound?
JOSEPH TREVISANI: Negative for the pound, that was a very long disquisition on uncertainty. It was an uncertain disposition. Because it's so difficult to see a clear path forward politically for this. Boris Johnson can come in and say we are leaving, no- deal Brexit. That's our new policy. The turmoil both in the financial markets, in parliament who has voted against it would be enormous. So, even if that is his conviction, and I'm not sure that it is, how do you affect it? How do you put it into play? Make it work? I don't know.
JUSTINE UNDERHILL: So, what levels would you be looking at here for the Euro versus the pound?
JOSEPH TREVISANI: Oh, right here, I would be going Euro-Sterling is about .8770 when I got on the number one train uptown. And it was probably at .8771, hit 96th Street and get on the two train. And I got back on the one train, that's really not very important, is it? No, sorry about that.
I would go long a little bit below the market here, which would probably be about .8710, I would look for a stop loss below about .8540. And about .8975 above, there's a little bit less of a profit risk reward on this one, mainly because that move has already taken- a good portion that move is taking place. That very quick run up in the past two weeks is one that you would like to have participated in once the news started coming out of Britain.
JUSTINE UNDERHILL: What would be your time horizon on this?
JOSEPH TREVISANI: Soon. I would go three months. But I would be aware of the political situations and what's developing in Britain. And I would be willing to either take profit or to cut the position short based on what happened there. Because there is a great deal. There's a great deal of room for surprises here. And you have to pay attention to those in a situation like this that is largely politically derived and politically based.
JUSTINE UNDERHILL: So, what would be the type of event that would cause you to back out?
JOSEPH TREVISANI: Well, Boris Johnson declined to accept the Prime Ministership. He didn't run for it. That would be one. He was up for it the last time and then he decided he didn't want to do it. So, or he wasn't ready for- whatever his reasons were. And I'm not sure. So, that would be a main one for something like that.
Another issue, which is much closer, probably not as determinative of this position, because of what we expect to happen would be the European elections. If the nationalist- the populist as they're called, candidates, they're running for a lot of the seats, all went down uniformly to large defeats. That would be a major change, a major shift, a comparable event was last weekend's vote in Australia. I mean, everyone expected the labor to win and they lost.
JUSTINE UNDERHILL: So, we've been talking a lot about politics. Are there any other market forces, let's say interest rates, economic figures that factor into this as well?
JOSEPH TREVISANI: Yes. If the European economy gets substantially worse, which there is a possibility for that. Political turmoil, market economies tend to be pretty resilient for political turmoil. An example here in the United States, when we had the government shutdown in most of January, a little bit of December, consumer sentiment took a very sharp hit, and it bounced back immediately. And there was almost no other effect.
If you look at GDP in the first quarter, that was 3.2%, on average for annualized, so it really didn't have any effect on that. But for something that is much more prolonged and drawn out, that example, if that had prolonged for three or four months, it probably would have had a serious economic effect. So, there's that potential here.
There's also the potential for the existing political leaders, Macron in France, Merkel- in the two largest ones, the most important ones- Merkel in Germany- that if their parties have a serious loss in this EU election, and there are parties running against them, specifically, against their policies. There isn't a national election due in either one of those countries. So, people are expressing their views about some of the national policies, the national leaders in this election, which makes it important.
So, if you get something like that, then that will have an economic effect. And that would certainly impact the vote and the positions we're talking about and the economies.
JUSTINE UNDERHILL: Are you also going to be watching what Draghi is doing?
JOSEPH TREVISANI: Yes. But Mr. Draghi is on his way out. And I think he's smiling a lot more and making more jokes in his last meetings, and I think he's probably ready to go. Yes. The problem for the ECB is that they are short of policy prescriptions right now. A while ago I said that I think that Mr. Draghi must be very envious of Jerome Powell in the Fed, because they are in a position that if something does happen, they have 2.5% of Fed funds rate to play with, they have nothing in the EU. So, I don't think that even if you get a serious and even more serious loans and if you get a recession in Europe right now. I don't think the ECB is going to do all that much, because there isn't all that much they can do.
JUSTINE UNDERHILL: So, for making this trade, you're doing the Euro versus the pound, why not just do the dollar versus the pound?
JOSEPH TREVISANI: Well, that's a good question. The main reason I would do this one is because I think that the European elections have more impact across the board there. So, I think you have both the European elections, and you have the British Brexit situation that are both going to impact the pound. And they play out more strongly against the Euro than they do against the dollar. Nonetheless, the dollar will go up, the pound will go down against the Euro, as well.
There's one other consideration, for longer-term positions, the Sterling against the dollar tends to be extremely volatile. The points from a trading point of view, the points are expensive. So, because of that volatility, it's much easier to get taken out of a position in a market run. Because the currency pair itself is not quite as stable. That's the other reason for doing it. The Euro-Sterling is essentially more stable. It's a more gradualist approach.
JUSTINE UNDERHILL: All right, could you break down this trade in 30 seconds?
JOSEPH TREVISANI: The Europeans are in for a bout of political instability. And Britain is in for a continuation of its political instability. Both of them lead to a lower pound against the Euro.
JUSTINE UNDERHILL: All right, Joseph, thank you so much for breaking this all down.
JOSEPH TREVISANI: Thank you very much for having me.
JUSTINE UNDERHILL: So, Joseph likes betting against the British pound versus the Euro. Specifically, he suggests going long EUR-GBP on a pullback to .8710 with the stop loss at .8540 and a target of .8975 over the next three months.
Just remember this is a trade idea and not investment advice. You should do your own research, consider your risk tolerance and invest accordingly. For Real Vision, I'm Justine Underhill.