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Capitalise on bear squeezes to short cable

IT DOESN’T take a lot to move the pound nowadays. Whether it’s weak data, a policymaker speaking or a ratings agency firing another warning shot over 10 Downing Street – and there have been plenty of all three over recent weeks – sterling is only responding in one way at the moment: down.

Against the dollar, the pound has fallen 6.4 per cent this year and it managed to fall by as much as 400 points in one day on 1 March. Data from the US Commodity Futures Trading Commission (CFTC) reveals that speculators had 63,473 more short bets in the week ending 9 March. This net-short position has averaged 60,548 in the five weeks to 9 March.

With sterling having already closed as low as $1.4967 this month, the questions are now whether it can go any lower against the dollar and if so, by how much. Fundamentals suggest that sterling is likely to fall against the dollar – US growth both this year and next is forecast to be stronger than expected according to the Centre for Economics and Business Research and the Fed is likely to tighten policy earlier than the Bank of England.

But unless you are already short of this volatile pair, jumping in to cable when it is already trading below $1.50 doesn’t offer much downside in the very near-term – it has already bounced twice off the initial support level of $1.49.

However, foreign exchange traders should be using these short-term upward moves as an opportunity to establish renewed bearish positions at higher levels. We saw such a move yesterday when cable fell to $1.4980 at the London open before bouncing up to $1.5120. One reason why we are seeing so much volatility at the moment in cable is because sentiment is so sterling-negative right now that the majority of people who want to be short already are.

Capital Spreads’ Simon Denham says that this situation could lead to a substantial bear squeeze. “We could even test $1.56, but one gets the feeling that any moves to the upside for sterling will not lead to a change in the overall trend,” he says, adding: “There are plenty of sterling bears out there who believe that this consolidation around the $1.50 mark is just a respite before the next big move down where targets are as low as $1.4460 and then $1.4080.”

A break below initial support could take the pair to as low as $1.40, which should firmly underpin the pair – on a weekly close basis cable has not traded below this level since mid-1985. But a break below $1.40 could see traders target last year’s intra-day low of $1.3753.

Sterling is heading lower but it’s unlikely to fall substantially below $1.40. If you aren’t short already you’ll need to wait for another squeeze higher to enter the market.