US Dollar on the move

As I ended my last blog on Wednesday (20th September), I was anticipating a higher move for USD across all major currencies. "Operation Twist" did not go down well with the markets. My take is, the Fed decision to sell the Short-term treasuries for LT bonds was already baked into the cake, much before it went official; instead, market was spooked by Fed's "significant risks" comment when characterizing the current state of our economy. Indeed, risks to the global economy are clearly high and slowdown in China and India, the engines of global growth, is a clear testament to the fact that things are not getting better.

So, backing USD to go higher was logical. Everytime risk sentiment takes a back seat, the major players in the financial markets start deleveraging. That's what happened. Although, I failed to short EURO (I recommended shorting Euro before Fed announcement but I never did go short, as it never hit my target of $1.38)it is worth noting that EURO lost more than 300 pips with great velocity and there just wasn't time to react. Also, the Australian Dollar (AUD) lost almost 500 pips.

Now, the question is, will the USD continue to go higher? I doubt it. Many funds and financial institutions are selling risky assets (gold and silver lost big, as margin hikes were put in place) and they are buying dollars to invest in US bonds ("go with the Fed" trade) and thus park their capital in safe assets. I think this "risk-averse" sentiment will dominate until EU takes some concrete steps in resolving Greece "default" situation and restores faith in the European banking system. Behind the scenes, I am sure, EU leaders and the major banks in Europe, are pursuading the Chinese, Japanese and all those countries with hefty foreign reserves, to invest in those banks that have significant exposure to troubled sovereign bonds. In its recent issue, The Economist, quoted that the major European banks, 38 of them, may need an infusion of $200 billion, to protect them from any possibility of Greek default. I just don't think, a mere capital infusion to "fill the hole" left by loss from sovereign debt portfolio, would do the trick; in fact, the psychological dent from a Greek default could be devastating and will ripple through the global financial system. It will be interesting to see how the world leaders manage this situation without precipitating a global crisis in confidence.

Having said all that, a mere wave of hand by Bernanke signaling another round of QE, in view of the continued crisis in the EU, would drive the risk assets again. The suddenn surge in USD buying will reverse in no time. Traders are ever on their toes, waiting for some sign of major rescue act on the part of US/EU/Asian authorities. When that happens, USD sellers will be back in full force.

These are extraordinary times in the Forex land. Those who don't follow the markets, tick by tick, can be wiped out in no time; stop-losses may help, but daily whipsaws can defeat a well-crafted trading strategy.

Be safe out there.

Day of "Operation Twist"

It is 11:30Am on this Wednesday and markets are in "wait and see" mode. Of course, end of FOMC meeting at 2:15 entails the announcement of details of the much anticipated "Operation twist." As I understand it, this is not about new liquidity infusion and instead more of re-arrangement of the Fed balance sheet; they are expected to sell the short-term securities and buy the long-term bonds and in the process flatten the yield curve further.

Different pundits see different things happening. Some ask, "how low the 10yr yield can go?" Obviously, they are questioning the wisdom of Bernanke&co in lowering the yields in anticipation of home buyers coming back into the market, with much lower interest rates! Well, does another 25 to 50 basis point move lower matter to those who are already sinking under debt load? Moreover, in this environment one can hardly muster up his/her animal spirits and get confident about housing prices going higher anytime soon. The world is experiencing that "thousand year flood" and nature will have to take its course. Blaming Obama or for that matter all these policies is not going to do much. Simple truth is, those who were close to the beach when this tsunami struck, will face the consequences. Some policies can help to alleviate the pain for a few, but most will look back at this point in history as a "cathartic" moment. Obviously, weak and the poor suffer the most (you can include the middle class in that category now); rich can see through this phase albeit, they will suffer too.

My source of frustration is: this man-made tsunami had at least few architects behind it--leaders, policy makers, institutions etc.--and my question is, have they been made accountable for their roles while we continue to witness the piling up of human carcass, (metaphorically speaking!)? Our justice system's reach is not that far; so, we just have to wait and see whether nature delivers its Karmic justice and punishes those who built their wealth on the foundation of human misery.

That's why I don't understand all these "twists and turns" by the policy makers. They think it helps; I believe in Bernanke's good intentions. But, humans have done their job; they screwed it up. Now, nature has to cleanse the system. It is similar to what Joseph Schumpeter talked about--"gales of creative destruction." Capitalism, needs to purge itself and go through a transformation. The cronies and the corrupt have too much power for a human system to deliver justice. The justice has to come from nature and those gales of creative destruction will drive the rotten and the incompetent out; just be patient.

Back to the markets; I have no idea how markets will react. So, I have come out of my FX positions. BOE is embarking on its own QE, so GBP may stay weak; Euro still faces PIIGS issues and weak Euro economy, so EUR may continue to languish; commodity weakness affects both AUD and CAD. So, if there is no more QE from the Fed, USD may surprisingly move higher.

So, I may just short EURO if there is a spike above 1.38.