British Pound Index - GBP Index Trading

In the foreign exchange turnover study carried out by the Bank of International Settlement in April 2013 7 leading currencies, which we have included for considering, stand out in monthly exchange turnover volumes.

In the right hand column the respective shares of currencies in the foreign exchange turnover of regulators are presented in descending order

In creating the index we consider (quote) GBP against “portfolio standard”, composed of 6 remaining liquid currencies: USD + JPY + EUR + AUD + CHF + CAD. The weight optimization is carried out so that the standard possesses the minimum sensitivity with respect to the events in UK. The weights, which correspond to the quoted standard, are selected on the basis of currency zone “non-interference” principle.

Let us explain the application of that principle. The table of liquid currency priority for foreign exchanges quoted against Pound is made on the basis of foreign exchange turnover 2013 study, where we apply a numerically small value 0.1% for the turnover share of the currencies not presented in the source:

The total share of GBP turnover relative to the liquid instruments under consideration is 11.1%. Then the residual share is equal to the difference between the total share and the currency pair share.

The residual share characterizes the currency (GBP) stability with respect to changes in the price of the quoted part. Indeed, In order to introduce significant volatility into the index the participation of remaining “counterpart” currencies (GBP vs X) is required with the weights equal to their share in the foreign exchange operations. Therefore the values from the right hand column of the Table 2 were applied for determining the currency weights for creation of the index.

Let us remind that the structure of the index can be represented as follows:

GBP / ( W1*USD + W2*JPY + W3*AUD + W4*CHF + W5*EUR + W6*CAD )

We shall take the Wi weights for the standard proportional to the residual influence share (the right hand column of the Table 2). Thus, we are raising the index stability with respect to events in UK. Then the index sensitivity will be determined by the base part – GBP. The estimates yield the percentage composition of the portfolio, presented in the Structure table.

The instrument & GBP _Index is highly sensitive with respect to fundamental changes in UK economic development and therefore well suited for trend following strategy in periods when key fundamental events are anticipated.

In NetTradeX trading platform buying the instrument means capital allocation between a long position in GBP and a short position in the portfolio standard.

&GBP_Index can be used for comparative analysis of the index vs. popular currency pair GBPUSD, by building, for example, a percentage chart in the NetTradeX terminal for the two instruments (Fig.1) and studying the price dynamics during 2014. It is evident that since mid-summer of 2014 the currency pair started to fall much faster than the index, which allows to make a conclusion, for example, that the USD was the main contributor to the fall.

Fig. 1

By comparing the price dynamics of the index and the currency pair for medium-term trade (Fig.2) it is evident that since July 2014 the GBP index is trading in a range with an upward drift while the GBPUSD currency pair started to fall steadily, i.e. the dynamics of the UK currency itself differed radically from the dynamics of the pair.

Fig. 2

Traders, who specialize in fundamental analysis and focus on the developments in UK economy and want to filter out the influence of other currency zones (for instance, events in USA and USD dynamics as in the example above) will be comfortable trading this instrument.