BofA: How to trade GBP seasonality in April

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By Samuel Indyk – In a recent research note, analysts at Bank of America Merrill Lynch highlight the key trends for 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. 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 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:). “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.”

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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.”


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