Buy GBP/USD Ahead of April's Dollar Bulltrap

Dollar bulls clinging to the hope that USD will turn around in the next month after the Trump deflation decline or those poised to buy the currency at a discount may be in for a disappointment argue strategists at UBS.

The reason for their pessimism is that seasonal factors make April one of the worst months for the Dollar.

“The USD is seasonally weak in April. Over the past 10yrs [2006, 2016] the average USD Index depreciation in April is about 1%,” say UBS in a strategy note seen by Pound Sterling Live.

The cause is a fall in US Treasury issuance. Treasuries are often purchased by foreign investors so a fall in issuance means a fall in the inflows from those foreign purchases.

Another reason is an increase in demand from US investors for foreign equities with the result that higher outflows come from those purchases.

Oil is another factor in the USD/April dynamic as it often rises in price during April due to refineries reopening after March maintenance shutdowns, or outages as they are called in the business.

Reopened refineries need to stock up on Crude so as to get production back up to speed, which increases demand for Crude and leads to an appreciation in price.

The Dollar is highly negatively correlated with oil, so when oil prices go up, the dollar goes down.

As a result of this seasonal effect, Commodity currencies, especially those linked to oil such as the Canadian Dollar, the Rouble, and the Norwegian Kronor are the winners, whilst the Dollar and those inversely linked to commodity prices such as the Yen and Indian Rupee tend to be the losers.

The Pound is a “special case” according to UBS, who say that it usually appreciates by an average of 2.0% during April.

This is not solely due to North Sea oil price rises as these only make up 10% of exports, but rather also due to the composition of the FTSE 100 and its heavy weighting to the oil and gas sector and petroleum.

These stocks tend to go up in April, sucking in foreign investor capital which increases demand for GBP.

Trade Recommendations: Sell USD/CAD

USD/CAD is a clear target in April given the falling dollar and rising oil relationship.

“Canada has the highest average return and best Sharpe ratio within the G10 space during April,” say UBS.

They add that in the last ten years short USD/CAD positions have made a profit in 9 out of the 10 years, with USD/CAD falling in a range between -5.37% and +0.26% (in 2010) during that period.

The recommend buying a digital Put at a strike price of 1.3325, which is an option which will make money if USD/CAD ends April below 1.3325 but otherwise will expire worthless.

Buy GBP/USD

Given the Pound has a propensity to rise and the USD to fall in April, the GBP/USD pair is another obvious target for an April trade.

UBS recommend buying a Call option which appreciates in value if GBP/USD ends April above 1.2588.

They note that GBP/USD is a profitable bet in April having the “highest Sharpe Ratio” which is a gauge of how successful a trading strategy is.

“GBPUSD has the highest Sharpe ratio for April in the G10 –reflecting the diversity of its drivers (both commodity beta and bond issuance),” stated the note’s authors.