Brexit – A Buying Opportunity

Major news! The GBP/USD has fallen HUGELY since June 23.

Everyone on investing boards and blogs should be discussing this en masse:

GBP/USD Brexit Effects

GBP/USD Brexit Effects

See that? That is a 10.43% decrease between June 23rd and today, July 5th. And now what a great time to buy in!

Sizing up the Situation

The United Kingdom, this is a major superpower we’re talking about. Big Time financial superstars hang out in the UK. Why do they? Well, the big banks are all located there, and guess what, they don’t like to fail for very long. (See US banks circa 2007-09 and the enormous support they received from governments to prevent total failure.) So in due time we’re going to see a correction of the GBP, but I’m doubtful that even the rise back to June 23 values will happen any time soon.

Lucky for me, though, this lull in GBP/USD market activity works out nicely. As of now, I am actively learning about foreign exchange trading. This means I won’t be making any moves for at least a week or two. Play money only. ;)

However I will be watching …

All the political debates and long-winded reasons for Britain choosing to leave the EU really just passed me by, but here I am looking at the inevitable reflection in my financial charts. So it’s time to act. However, before I act, I must pay attention and learn to read the trends.

GBP/USD Long Range Chart

GBP/USD Long Range Chart

Since 2000 the GBP has seen fall-offs like the one we’re currently experiencing, and it has recovered quite handily through each one. This little depression will be no different, it’s just the latest drama showing in the “Global Markets Theater!

Goals and Analysis

It helps to have goals. No, scratch that. They are absolutely necessary when dealing in investments, speculation, and gambling. My goal is to make between 8-10% in the short term. This means that one of the patterns I am looking for in the bland yellow Long Range chart above is continual one- or two-year instances of uptick or downturn comparable to the negative 10.43% movement we’ve recently seen.

If the annual measurements are similar, this metric has successfully 1) ruled out a flat, non-performing currency pair, and 2) shown that historically the currency has been continuously capable of short term ~10% swings on a 1 or 2 year basis. The value would then meet my 8-10% return criteria and the currency would become a logical investment. This kind of analysis may be elementary, but it’s my theory. Let’s see how it plays out!

January 2009 through July '09, includes a 20 day period Simple Moving Average

January 2009 through July ’09, includes a 20 day period Simple Moving Average

A point that the graph above makes is that right now the GBP is the most undervalued it’s been since January 2009. (Jan ’09 is marked on the chart, that date itself the lowest since around 2001.) But even still, I do not think this recent political shake-up is as devastating as the ’09 Global Market depression. With this in mind, I doubt we’ll be seeing crazy market response rebounds to the Brexit issue like what we were seeing 10 years with the bailout catastrophe.

Although the GBP could be more undervalued, as it was in 2009, right now seems like a pretty great time to take a look at the currency. I base this off of my interpretation of the notable gap between the low blue 1.3074 GDP value and the high red 1.4741 20 day SMA trend-line value. Because it is valued higher (11.3%), this means that it can be had an incredible discount. Seems like the right time for buying to me!

 

January 2009 through July ’09, includes a 20 day period Simple Moving Average

January 2009 through July ’09, includes a 20 day period Simple Moving Average

As an aside, check it out! After Jan ’09 there was a massive recovery. July 2009 would have been an excellent time to sell @ 1.6705, +13.45%; of note, GBP was valued higher than the SMA on that date. Then, it wasn’t until June 2014FIVE YEARS LATER—that GBP finally passed the July ’09 high, but really by only 2.66% or half of 1 percent every year. Ouch!

A Plan in Motion

If I’m in it for about 2 years, chances are that the currency will bring itself back up about 4-6% each year. Or, quite unexpectedly, it may go up 4% and then down 6% … but then it has to come back up at some point! (Historically speaking, anyway.)

Then again, in 6 or 7 months we could be looking at another 11-13% appreciation run, like we had back in July of 2009. That would be fantastic!

Either way, it looks to be an interesting time to invest in a manner I’ve never done before, Forex markets. It’s great to have goals, analysis to back up my strategy, and criteria that sets boundaries for this experiment. Best of all, the act of becoming familiar with a new environment and understanding how it integrates with the world is a life-enriching experience.

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