Hopes of a Brexit breakthrough gained momentum Thursday after French President Emmanuel Macron stated that the Withdrawal Agreement could be changed to allow the United Kingdom to leave the European Union (EU) with a deal in place. The French president’s more accommodative stance marks the first time an EU leader has stepped back from the hardline “no amendment” approach.
German Chancellor Angela Merkel also added a more compromising viewpoint yesterday, suggesting that a solution to the Irish border backstop issue could be found before the Oct. 31 Brexit deadline.
"I said that what one can achieve in three or two years can also be achieved in 30 days. Better said, one must say that one can also achieve it by Oct. 31," Merkel told a news conference in the Hague, per Reuters.
Newly installed British Prime Minister Boris Johnson has repeatedly threatened that Britain will crash out of the EU without a deal if the backstop remains in the agreement. The backstop requires maintaining a seamless border between the Republic of Ireland and Northern Ireland - which is a part of the United Kingdom - open in the event that a future trade deal can’t be agreed upon at the end of a 21-month transition period.
Those who want to position for a stalemate breakthrough between Westminster and Brussels before the Halloween cutoff should consider these Brexit-sensitive exchange-traded products (ETPs). Let’s review the metrics of each fund and run through several trading opportunities.
iShares MSCI United Kingdom ETF (EWU)
Launched in 1996, the iShares MSCI United Kingdom ETF (EWU) aims to track the performance of the MSCI United Kingdom Index. The benchmark comprises of stocks that trade on the London Stock Exchange (LSE) and covers the top 85% of companies by market cap. Key holdings in the fund’s portfolio of roughly 100 stocks include HSBC Holdings plc (HSBC), Royal Dutch Shell plc (RDS.A) and BP p.l.c. (BP). Daily turnover of nearly 1.7 million shares and a narrow average spread of 0.03%, keeping trading costs manageable. The fund charges a competitive 0.47% management fee. EWU has assets under management (AUM) of $2.13 billion, issues an attractive 4.56% dividend yield and trades up just 4.17% year to date (YTD), underperforming the U.S. stock proxy S&P 500 Index by 12.43% over the same period as of Aug. 23, 2019.
EWU shares added most of their YTD gain between January and April, setting a 2019 high at $33.17 on April 16. Since that time, the price has oscillated within an orderly descending channel. More recently, the fund found support near the pattern's lower trendline at $29.50 that may lead to further short-term upside. Further, the moving average convergence divergence (MACD) indicator crossed above its signal line earlier this week to generate a buy signal. Those who take a long position should look for price to test the channel’s upper trendline and set a stop-loss order underneath the August low at $29.29.
Invesco CurrencyShares British Pound Sterling Trust (FXB)
The Invesco CurrencyShares British Pound Sterling Trust (FXB) provides exposure to fluctuations in the value of the British pound relative to the U.S. dollar. The fund, which launched 13 years ago, takes a vanilla approach by simply holding British pounds in a deposit account. Traders should note that FXB's deposits sit uninsured, which leaves investors exposed to the default risk of the depository bank - JPMorgan Chase & Co. (JPM). FXB leads the space in terms of size and liquidity with net assets of $136.55 million and almost 40,000 shares changing hands per day. A razor-thin 0.02% spread also ensures slippage doesn't eat into bottom-line costs. As of Aug. 23, 2019, the fund has slipped 4.87% for the year – a substantial decline for a Group of 10 (G10) currency.
The FXB share price has traded within a steep descending channel since early April. Since bottoming on the pattern’s lower trendline on Aug. 9, the fund has moved toward the top of the channel, breaking out above an inverse head and shoulders (H&S) pattern in the process. The relative strength index (RSI) gives a reading just above 50, allowing the price ample room to move higher before consolidating. Those who take a trade should anticipate a move to $122, where the fund may encounter overhead resistance from a horizontal line stretching back over the past 12 months. Protect downside by placing a stop slightly beneath the inverse H&S pattern’s neckline.
VelocityShares Daily 4x Long GBP vs. USD ETN (UGBP)
With net assets of $2.23 million, the VelocityShares Daily 4x Long GBP vs. USD ETN (UGBP) seeks to replicate the performance of the VelocityShares Daily 4X Long GBP vs. USD Index. The fund provides a cost-effective instrument for traders to gain leveraged exposure to changes in the spot exchange rate between the British pound and the U.S. dollar as well as overnight interest rate differentials in the two currencies. Traders should be aware that returns for holding periods greater than one day may deviate from the fund's advertised four times leverage due to the effect of compounding. Consider using limit orders to combat the fund's slightly wider 0.13% average spread and thinner daily trading volumes of about 3,000 shares. UGBP has slumped 22.04% YTD, falling almost 11% in the last month alone as of Aug. 23, 2019.
The UGBP chart closely mirrors that of FXB, given that both funds track the performance of the GBP/USD exchange rate. Bearish sentiment has persisted since early April and gained momentum in mid-May when the 50-day simple moving average (SMA) crossed below the 200-day SMA to generate what technical analysts refer to as a “death cross” – an eerie signal that forewarns further selling. However, the price has staged an uprising in recent sessions, threating to break above a descending channel's top trendline and trigger a short squeeze. Traders could exit at either $17.50 or $19 – both key resistance levels, while limiting risk with a stop situated somewhere under yesterday's low at $14.89.