Fail Britannia!

…or why short the British Pound?

A quick jump into market waters during my summer break to give you the heads up on the state of the British pound and why many pundits think it’s a compelling short play.
Fundamental reasons to loathe the currency
1. Goldman Sachs (GS) recommended shorting the pound last December. This was after the it peaked in October (see weekly FXB chart below). Breaking $204 support in December was all one needed to be convinced this currency was heading down down down.
2. Lehman (LEH) cited seven reasons to hate the quid.
3. A Citigroup (C) analyst was quoted as saying “the pound is the currency to hate in 2008.”
The general consensus among the major financial institutions is that shorting the pound is THE trade of the year.

Technical reasons to short it
Look at both the daily and weekly charts of the FXB, the ETF that tracks the British pound, and you’ll see that major support at $194.50 was broken convincingly last Friday (8/8/08). Since then, it’s traded down to its $187 minor support level. Goldman recently issued a statement saying that they see further downside to at least $164 which is 12% below its current level.
(FYI: Other currency tracking stocks are listed below.)
How can I profit from this?
You can either short the FXB or buy puts or other bearish options spreads (options are fairly liquid depending on strike and month), but I’d wait until the price drops below current levels just to be sure. (Note: If you elect to short the stock, check with your brokerage firm to see if it’s on their short list. One of my trading accounts is with OptionsXpress and checking with them today I see that the FXB is NOT currently on their short list. If it’s not on your broker’s list, call them up and tell them that you’d like to short X number of shares and see if they can make those available to you.)
Why not just buy the US Dollar?
Because looking at the chart (given below) for the long dollar tracking stock, the UUP, you’ll see that it needs to clear resistance at $24 and even if it manages to jump that hurdle, it faces major resistance at $25. So, instead of a potential 12% ROI (return on investment) in the British pound you’re looking at only a 4% return by going long the dollar. (Of course, if you buy UUP calls, your return will be much higher.)
In summary, fading the pound might help keep you in the (fish ‘n’) chips.
Long Currency ETFs: UUP: US Dollar
FXB: British Pound
FXA: Australian Dollar
FXC: Canadian Dollar
FXE: Euro
FXY: Japanese Yen
FXM: Mexican Peso
FXS: Swedish Krona
FXF: Swiss Franc
Note: Some of these pay a nice dividend.
Short Currency ETFs:
UDN: US Dollar

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