🥇 First rule of investing? Know when to save! Up to 55% off InvestingPro before BLACK FRIDAYCLAIM SALE

BofA: How to trade GBP seasonality in April

Published 30/03/2021, 09:11
© Reuters.
GBP/USD
-
UK100
-
BAC
-
IBOXXFXGBPE
-

By Samuel Indyk

Investing.com – In a recent research note, analysts at Bank of America Merrill Lynch highlight the key trends for GBP during the month of April. The American investment bank notes that April seasonality has been a persistent theme for GBP over the last 20 year with it being consistently the best month for GBP, particularly against the USD. GBP/USD has rallied by nearly 2% on average with only Brexit derailing these flows.

Why is GBP strong in April?

The view is that the outperformance stems from USD-functional FTSE listed companies paying quarterly dividends and the underlying flow is driven by repatriation of foreign currency overseas earnings.

“Dividends paid by companies with a larger part of revenues abroad (and hence the ones likelier to result in repatriated earnings prior to dividend payments) are actually highest in Feb, May and August,” says Bank of America (NYSE:BAC). “This seasonality of dividend payments by USD-functional companies can result in corresponding seasonality in earnings repatriation and FX rates.”

“Our analysis shows that whilst April is the strongest month for GBP trade weighted index (TWI), GBP/USD is the major beneficiary, adding credence to our view that the underlying flow is being driven by USD-functional FTSE listed companies paying quarterly dividends.”

A word of caution

Despite the clear outperformance in April, Bank of America issue a note of caution.

“Naturally, given the systematic nature of GBP outperformance through April, there is a risk that the markets are now well aware of this phenomenon which means a certain amount of pre-positioning ahead of the event will have taken place,” the bank writes. “This will inevitably make analysis of the underlying flow more difficult, but we are confident that the driver of the GBP move is flow related.”

The bank also notes that when indexing GBP/USD to the end of March, there is a “steady appreciation” but a noticeable acceleration after the third week in April, suggesting a measured approach to trading.

“Patience may be required in trading a higher GBP view through the month,” the bank says.

Currency Pairs

When you break down the GBP move against other G10 currencies, it performs best against the USD. However, it is also strong against the CHF and JPY. A noticeable theme is that GBP performs well in April against the traditional ‘safe-haven’ currencies.

“GBP outperformance versus CHF and JPY perhaps suggests that flows may be driven to some extent by risk-on flows,” BofA says. “But once again, the consistency of GBP outperformance over the past 15-years through various phases of the business cycle does indicate that the source of the outperformance is exogenous flow.”

 

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.