Pound ETF Plunges: More Sell-Off In The Cards?
Zacks Investment Research | Jun 28, 2016 02:52AM ET
By now, the whole world is aware of the shocking outcome of the Brexit referendum in which 51.9% Britons voted in favor of leaving the EU, leaving the ‘remain' camp behind by just 3.8 percentage points. With this, the last Friday turned into another black day for the investing world as it led to a bloodbath in the global market. Only safe assets are flying high.
Amid this turmoil, the asset that has hogged immense attention, albeit for wrong reasons, is the British currency pound which has sunk to a three-decade low.
Why the Decline in Pound?
Most importantly, the market is abuzz with talks that the British economy could now sink into a recession. As per the UK government data , this break-up will lead the British economy to contract by 3.8% to 7.5% by 2030.
Britain will lose the benefits of free trade within the EU countries. Since EU shares an intense trade relation with Britain, the levy of new trade barriers may hurt the country’s economy. Even president Obama indicated that Brexit would push the UK to the 'back of the queue' in trade.
These negative sentiments pushed the British currency to as low as $1.3224 on June 24, as per CNBC.com. CurrencyShares British Pound Sterling ETF (NYSE:FXB) Brexit Shocker Forces These European ETFs Over 10% Lower ).
Bearish Analysts’ Comments
Already UK Votes for Brexit: ETFs Winners & Losers ).
As per UBS economist , U.K. interest rates are likely to fall to zero from the present level of 0.50% in the next six months as Bank of England will have to remain steadfast in boosting the waning economy. This will leave no scope for pound outperformance or stabilization in the near term.
Singapore bank DBS cautioned that though pound recovered after the key the trading sessions, the worst may not be over. The firm warns the worst-case scenario of the pound plunging 10–20% on a trade-weighted basis. That indicates that the pound could even skid to the $1.15–$1.25 level, and may even "overshoot" to $1.05.
Since poll results released last week indicated higher chances of ‘Bremain’, investors are now likely to react in two ways to the pound. First, they will wind down the Bremain-backed surge from the currency and then discount the long-term expectations, according to the CIBC . His projection for pound is as low as $1.15 for the coming few months.
FXB in Focus
As FXB tracks the movement of the British pound sterling relative to the U.S. dollar, it could see a wild ride in the months ahead with Britain choosing to depart from the EU. The expense ratio of the fund is 0.40%. The ETF has amassed $79.9 million in its asset base. So far this year (as of June 24, 2016), the fund is down over 7.6% (read: Growing Brexit Debate Brings ETFs in Focus ).
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Technical Parameters of FXB
From a technical perspective, Relative Strength Index (RSI) of the fund is 33.02%, which points to the oversold territory The Williams %R data for the fund is negative 94.62 which also hints at an oversold territory. But we believe that since the fund is not ready for a reversal, it may plummet further. The fund’s weighted alpha is negative 14.70. A negative alpha hints at more pain.
Our Take
The only ray of hope is that more than 3 million U.K. residents signed a petition on the website of the Parliament, asking for a second vote. Since Parliament must discuss any pitch with over 100,000 signatures, this huge turnout may cause some changes in the Brexit move. However, the likelihood of such a movement is negligible.
All in all, the pound ETF is definitely not a Buy, especially with a near-term notion. But investors having a strong stomach for risk may tap it with a long-term view. After all, all the downside movement in the fund will be capped in fast, in fact over the next few sessions, as investors are hurrying to price in the looming risk in pound.
With this, the currency and the related fund will bottom out soon and give way to a reversal. To decide on an entry and exit, investors can use the above-mentioned projected lows that the pound is expected to hit in the near term.
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