Quant Analyser :

GBP likely to display strength pushing GBPINR towards life highs…

Amit Gupta amit.gup@icicisecurities.com

Rohit Gokhale rohit.gokhale@icicisecurities.com

August 5, 2014
Positional Recommendations

Long GBPINR:
Long GBPINR in the range of 101.15-101.65, Target1: 105, Target2: 108, Stop loss: 99.70
Rationale:
The rally of the GBPUS$ which began in the second half of 2013 has also surpassed 2009 highs
of 1.70. In the last year, the GBP gained about 10% against major currencies like the US$, euro,
USDINR etc. While the GBPUS$ is in an uptrend, the GBP has gained strength against the INR as well,
Strategy which has resulted in noticeable short covering in GBPINR future contracts. In the recent past, we
GBPINR Strategy have seen economic data of UK improving. Major data points like improving GDP, industrial
production numbers, reducing unemployment rate and the recent jump in inflation numbers
have also helped GBP to gain strength. Commodity Futures Trade Commission (CFTC) data also
suggests long formation in GBPUS$ future contracts. We believe all this may get reflected in
further strengthening of the GBP against most global currencies. Hence, we suggest going long
on the GBPINR on declines with an expectation that it may breach its nine-month long resistance
zone of 105 and move towards 108

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Deal Team
GBPINR, GBPUS$–may
Atsee
Your Service
upward moves with strengthening GBP in near term…

• The up move of the GBPUS$ commenced in mid-2013 and continued in July 2014 as well. Supported by improving
economic data the currency pair has managed to surpass its 2009 highs of 1.68
• The initial decline in May 2014 and a successive weak pullback at the beginning of June saw noticeable short build
up in the GBPINR. However, the rally in GBPUS$ towards 1.718, which is also a five-year high, allowed the GBPINR to
rally from its nine-month long support of 98 towards 103.6 levels on the back of covering of short positions. This rally
also got fuelled by the recent weak move of the INR
• With the given facts suggesting a possible strengthening move by the GBP in the near future, we believe the GBPUS$
could see some supportive bounce from 1.68 levels towards its median mark (1.74) of the fall of 2008. This could
allow the GBPINR to see a short covering bounce towards 105 levels and beyond

GBPINR GBPUS$
140
GBPINR witnessing short covering 104
1.9
120
102 1.8 Crossover of 2009 highs
100
100 1.7
80
OI in Thousands

60 98 Price
1.6

40 96
1.5
20 94
1.4
0 92
29-Apr

2-Jul
8-Jul
14-Jul
18-Jul
24-Jul
6-May
12-May
19-May
23-May
29-May
4-Jun
10-Jun
16-Jun
20-Jun
26-Jun

1.3
9/14/08

1/14/09

5/14/09

9/14/09

1/14/10

5/14/10

9/14/10

1/14/11

5/14/11

9/14/11

1/14/12

5/14/12

9/14/12

1/14/13

5/14/13

9/14/13

1/14/14

5/14/14
Open Interest GBP INR
GBPUS$
Source: Bloomberg, ICICIdirect.com Research

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Dealdata
CFTC Team – longs
suggests At Your Service
still intact in GBPUS$ despite recent profit booking…

• Options data suggests GBPUS$ to garner support on GBPUS$S September options build-up
declines near 1.67-1.68 levels: GBPUS$ September 2100
GBPUS$ Sept Options build up
options data (on CME) shows aggressive Put writing on 1800
the lower side with significant open interest build-up
1500
seen at 1.69, 1.67 & 1.665 strikes. On the other hand, the

Open Interest
highest Call base is placed at 1.73 levels with open 1200

interest of nearly 1500 contracts. The structure suggests 900

that the current corrective move of GBPUS$ is likely to 600

find support near 1.67 levels and could see a pullback
300
towards the highest Call base of 1.73 in the near term

165.50

166.25

167.00

167.75

168.50

169.25

170.00

170.75

171.50

172.25

173.00

173.75

174.50

175.25
Call OI Put OI Strikes (adjusted with 100x)

• Most longs remain even after recent corrective decline: CFTC GBPUS$ net non-commercial contracts
As per CFTC data (net non-commercial contracts), in the
60000
second half of 2013, the GBPUS$ witnessed significant
40000
short covering, whereas, from the beginning of year 36308
33090
20000 27497
2014, it attracted fresh longs (net long non-commercial 10672
0
contracts reached 56412 by early July 2014). In July, the -9303
-20000
pair dipped from their five-year highs of 1.718 to 1.69,
-40000
which resulted in partial profit taking (contract size -43046
-60000
reduced to 27497 by end of July). The pair still holds
-80000 -77738
substantial long positions, which means it may again
Aug-12

Apr-13

Aug-13

Apr-14
Jul-12

Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13

Jun-13
Jul-13
May-13

Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14

Jun-14
May-14
resume the uptrend
CFTC Net Non-commercial Contracts

Source: Bloomberg, ICICIdirect.com Research

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Deal
UK GDPTeam – At Your
numbers improving… Service
although GDP per capita growth yet to see noticeable recovery

UK’s GDP: Steadily improving GDP numbers: UK GDP growth rate QoQ
As we know, a change in gross domestic product (GDP) is 6
5
the key indicator of each country’s economic health. 4
3
During the major economic crisis starting from 2008, the 2
1
GDP of countries like UK went down drastically. The years

Rate in %
0
2009-10 remained a nightmare for UK as its GDP growth -1
-2 Period of Economic Crisis
had slipped to -6.8% and remained in the negative -3
-4
territory for the whole year. In the last three years, it -5
-6
started to see a revival much better than other countries -7 Hit low of 6.8%
-8
as its GDP growth saw a sharp shift to the positive

Jun-13
Jun-07

Jun-10
Jun-01

Jun-04

Dec-05

Mar-08
Dec-08
Sep-09

Mar-11
Dec-11
Sep-12

Mar-14
Sep-00

Mar-02
Dec-02
Sep-03

Mar-05

Sep-06
territory of 3.1%. Even though the GDP numbers are
attached to positive optimism, the equally rising
population has still remained a barrier in its growth GDP Per Capita
model. Due to such growing population numbers, per 41000.00 40230.96
capita GDP has not risen significantly. However, the green 40000.00
shoots are visible indicating economic strength coming 39000.00
37955.11
back in the UK and a steady improvement in the near 38000.00 37277.48

future cannot be ruled out, which can push GBPUS$ 37000.00

higher. 36000.00
35000.00
34000.00
33000.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
GDP per capita (US$)

Source: Bloomberg, world bank, ICICIdirect.com Research

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Deal
UK Team
industrial – At Your
production Service
increases since September, 2013… CPI numbers showing signs of rise…

Reversal seen in UK’s inflation figure: UK’s inflation numbers (MoM)

The past five years (from 2008 to 2013) have witnessed 5.5

sharp ups and down in CPI numbers in the range of 1.1% 5

4.5
to 5.2%. In the quarter ending June 2014, inflation 4
numbers clearly showed a jump (to 1.9%) just the way it 3.5

Rate in %
did towards the end of 2009. 3
2.5
2

1.5
1
0.5

UK’s industrial production numbers showing uptick of

UK’s industrial production (MoM)
average 2.3% growth since September 2013:
Post the period of economic crisis, industrial production 5 5%
2.3%
had witnessed a significant recovery in 2010 while for the 3
1
succeeding two years they posted soft numbers
-1
suggesting the economy was still struggling. The second Rate in % -3
half of 2013 yet again saw a revival in industrial -5 - 4%
production, which turned positive from September 2013. -7
-9
IIP numbers have continuously been rising since
-11
September and increased to 2.3% till May. If the UK -13
-12.1%
manages to maintain its steady recovery in the industrial
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
segment, we could see an improving health of the
economy in the near future Source: Bloomberg, ICICIdirect.com Research

6
Deal
Low Team – and
unemployment At rise
Your Service
in housing prices also suggesting signs of improvement…

Unemployment rate declines from 7.83 to 6.97 in last Rate of unemployment in UK

year… Decrease from
9
In 2008-09, the global economic downturn hammered 8.37% to 6.97%

major developed economies on several fronts. One of the 8 Steep Rise in rate of
Unemployment
after effects was a sharp increase in joblessness in
7

rate in %
countries like UK. In this crisis period, unemployment in Increase from
UK rose from 5.2% to 7.9%. Post that the economies of 6 5.2% to 7.9%

countries like the UK started to improve due to steadily

5
improving industrial production and GDP numbers, mainly
contributed by a strong recovery in service sector. It 4

Mar-00

Mar-01

Mar-02

Mar-03

Mar-04

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

Mar-14
created new jobs, which, in turn, reduced unemployment
rate from 7.83 to 6.97 in the last year.
UK’s Housing Data (Price Index)
UK Housing Price Index: recording sharpest price increase
since 2004 30
The UK housing market was severely impacted by the 2008 25
20
financial crisis, which started from the US housing market.
15
During this crisis, prices in the UK property market 10

Rate In %
corrected as much as 20%. However, with quantitative 5
0
easing by BoE, the housing market stabilised in 2010. -5
Since then, with the expansion of GDP, the housing market -10
-15
has also got the needed push and the same is reflected in -20
the chart given on the right. The price increase in the
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
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Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Jan-13
Jul-13
Jan-14
property market is one of the highest in over a decade. UK Nationwide Housing Price Index

Source: Bloomberg, ICICIdirect.com Research

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 Deal Team – Atyield
(Ten-year-two-year) Your Service
spread in UK contracting of late….

• The sovereign debt crisis of 2010 marred the economies of UK 10-Yr – 2-Yr G-Sec Yield Spread
euro peripheral area. With the outbreak of the debt crisis in UK 10 Year - 2 Year Yield spread contracting
250
2010, yields of the PIIGS (Portugal, Italy, Ireland, Greece &
225
Spain) nations soared to historic highs. This also impacted the

Yield spread (in Bps)

200
sovereign bonds of developed economies like the UK where
175
the yield on 10- year benchmark moved up 100 bps from 2.8%
to 3.8%. However, with BoE intervention with the stimulus, 150

yields corrected and are currently at 2.58% 125

100

13-Jul-12

13-Sep-12

13-Jul-13
13-Nov-12

13-Jan-13

13-Mar-13

13-May-13

13-Sep-13

13-Jul-14
13-Nov-13

13-Jan-14

13-Mar-14

13-May-14
• A look at the yield curve of the UK suggests flattening of the
curve. The short date end is continuously moving up and the
the yield on the current two-year is at 0.85%, which is the
highest level since June 2011. On the other hand, the 10-year BoE Bank rate
benchmark is at 2.58%, which is at a two-month low (due to 17
flight to safety play). As a result, the yield spread i.e. 10 year - 15
13
two year is at 173 bps, the lowest reading since July 2013.
11
9

Rate in %
7
• The UK bank rate has been constant at 0.5% since March 2009.
5
This is the historically lowest level seen in decades. 3
1
-1
-3

Source: Bloomberg, ICICIdirect.com Research

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GBP vs. major global peers : GBP continues to outperform its developed market peers…

• The past three month’s data suggests that against GBP, except Russian Rouble, Canadian dollar and Austrian dollar,
major currencies of developed economies have depreciated. Over the past three months, GBP has shown strength
with outperformance among peers. It gained nearly 4% against euro and Swiss Franc while against US$ it
appreciated more than 1%
• If we compare YoY change of major currencies of developed economies against GBP, it is clearly visible that GBP
has shown significant strength against all with over 10% gains against most currencies
• As we have observed, with improving economic data out of the UK in the last one year or so, the same has been
reflected in currency’s outperformance vis-à-vis major developed market currencies

Major Global Currencies against GBP (YoY) Major Global Currencies against GBP (3M)

Current Year Back %change Status Current 3M Back %change Status

Eurozone (EURO) 0.79 0.86 -8.34% Depreciated Eurozone (EURO) 0.79 0.82 -3.89% Depreciated
Japan (JPY) 172.88 151.09 14.42% Depreciated Japan (JPY) 172.89 171.93 0.56% Depreciated
US (US$) 1.70 1.54 10.36% Depreciated US (US$) 1.70 1.68 1.03% Depreciated
Switzerland (CHF) 1.54 1.43 7.56% Depreciated Switzerland (CHF) 1.54 1.48 3.71% Depreciated
Austrailia (AUD) 1.81 1.66 8.76% Depreciated Austrailia (AUD) 1.81 1.81 -0.40% Appreciated
Taiwan (TWD) 50.93 46.00 10.71% Depreciated Taiwan (TWD) 50.93 50.88 0.10% Depreciated
Canada (CAD) 1.84 1.58 16.09% Depreciated Canada (CAD) 1.84 1.85 -0.82% Appreciated
Russia (RUB) 59.65 50.45 18.24% Depreciated Russia (RUB) 59.64 60.12 -0.80% Appreciated
Source: Bloomberg, ICICIdirect.com Research

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Deal Team
Forthcoming – and
Events At Triggers
Your Service
in UK …

Key Data to be watched :

• 31 July : Gfk Consumer Confidence
• 01 Aug : PMI Manufacturing
• 05 Aug : PMI Services & Composite
• 06 Aug : Industrial & Manufacturing Production
• 07 Aug : BoE Bank Rate & BoE Asset Purchase Target
• 13 Aug : Jobless Claims change
• 14 Aug : RICS House Price Balance
• 15 Aug : GDP numbers
• 19 Aug : CPI, RPI and PPI
• 29 Aug : Gfk Consumer Confidence
• 01 Sept : Mortgage Approvals
• 01 Sept : PMI Manufacturing
• 01 Sept : BoE Gfk Inflation expectation
• 03 Sept : PMI Services and Composite
• 04 Sept : BoE Bank Rate and BoE Asset Purchase Target
• 09 Sept : Industrial & Manufacturing Production
• 11 Sept : RICS House Price Balance
• 16 Sept : CPI, RPI and PPI
• 17 Sept : Bank of England Minutes
• 17 Sept : Jobless Claims change
• 25 Sept : Nationwide House PX
• 29 Sept : Mortgage Approvals
• 30 Sept : Gfk Consumer Confidence
• 30 Sept : GDP & Current Account Balance
• 01 Oct : PMI Manufacturing
• 03 Oct : PMI Services and Composite
• 07 Oct : Industrial & Manufacturing Production and NIESR GDP Estimate
• 08 Oct : BoE Credit Conditions Survey
• 09 Oct : RICS House Price Balance, BoE Bank Rate & BoE Asset Purchase Target
• 14 Oct : CPI, RPI and PPI
• 15 Oct : Jobless Claims change
• 24 Oct : GDP
• 27 Oct : Nationwide House PX

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Portfolio allocation in Derivatives Products…

Trading Portfolio allocation

• It is recommended to spread out the trading corpus in a proportionate manner between the various derivatives
research products.
• Please avoid allocating the entire trading corpus to a single stock or a single product segment.
• Within each product segment it is advisable to allocate equal amount to each recommendation.
• For example: The ‘Daily Derivatives’ product carries 2 intraday recommendations. It is advisable to allocate equal
amount to each recommendation

Allocation Return Objective

Product wise Max allocation Frontline Mid-cap
Products allocation per stock Number of Calls Stocks stocks Duration
Daily Derivatives 5% 2-3% 2 Stocks 1% 2-3% Intraday
Weekly Derivatives 10% 3-5% 2 Stocks 3-5% 5-7% 1 Week
High OI stock 5% 2-3% 2-3 Stocks 5-7% 7-10% 1-2 Weeks
Monthly Derivatives 20% 3-5% 4-7 Stocks 7-10% 10-15% 1 Month
Global Derivatives 5% 2-3% 1-2 index strategy - - 1 Month
Stock Trader/ Stock in Focus 10% 2-3% 5-6 Stocks 7-10% 10-15% 3 Months
Alpha Trader 5% 2-3% 2-3 Alpha strategy 5% - 3 Months
Volatility Insights 5% 2-3% 1-2 Strategy 8-10% 10-15% 1-2 Month
Arbitrage Opportunity 5% 2-3% 2-3 Stocks > 2.5% >2.5% Event Based
Positional / Daily Futures 10% 2-3% 8-12 Stocks 1-3% 2-5% 1-14 days
Index option & Strategy 15% 3-4% 2-5 Nifty 2-3% - 1-14 days
Stock option & Strategy 5% 3-4% 2-8 Stocks - 3-5% 1-14 days
Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com
ICICIdirect.com Research Desk,
ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road no.7, MIDC
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

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