Well, I talked about this "rally in risk currencies" in my previous post here on 11/26. I particularly warned about "behind-the-scenes machinations" that would provide a liquidity boost to the global financial system. The signs were quite conspicuous, as European financial system was seen as "freezing" because of lack of interbank lending. Something had to be done by someone and it was our own Fed, which came to the rescue.
At around 8am EST, Fed announced "currency swap" provision with EU banking system. This was obviously to stop the potential "bank run" that was threatening the global financial system. Along with the US Fed, other central banks--BOJ, SNB, ECB, PBOC--around the world acted in a coordinated fashion to provide liquidity to the ailing European banks. Today, around 5:30am, when the news about China's PBOC's decision to ease the reserve requirements for the banks floated on my screen, I realized that there is something "cooking" among the central bankers around the world.
The trigger had been pulled! Like I said in my previous post, there were many traders who were not ready for this, yet they had their fingers on "Sell US dollar" button. So, EURO, AUD, NOK, GBP...every one of these beaten down currencies rallied instantly. It was one of those "black swan" rallies that drives the price changes beyond "3-sigma" around the moving averages.
Let's look at some of the profit-making trades based on the recommendations I had made in the previous post...
Although, I was quite positive about the EUR/USD rally from $1.325, I wasn't enthusiastic about the "EUR long" trade, as I find it hard to digest euro's inherent problems. It did spike up to $1.353. My recommendations: "go long the AUD, GBP and NOK against the USD." So, if you had, say, one "standard lot" a position of 100,000 units of each of those aforementioned currencies against the USD (at 50:1 leverage, you need $6,000 to do these trades)then, following the "entry" and "exit" at the following price points would have resulted in following profits:
AUD/USD: Buy 100,000 AUD at $0.9800 and Sell at $1.02 (it rallied to $1.035), 400- pip profit translates into a USD profit of $$4,000 (1 pip = $10/100K position)
GBP/USD: Buy 100,000 GBP at $1.55 and Sell at $.15750 (rallied to $1.578), 350-pip profit translates into a USD profit of $3,500.
USD/NOK: Sell USD 100,000 (that is buying NOK) at 5.85 (it was at 5.90 in the beginning of the week and today USD fell to 5.73) and buy USD back at 5.75 for a 1000-pip profit, which translates to approximately $1,700 (ipip = $1.7/100k).
So, for a $6,000 investment, this week, on this move in risk currencies, one could have made $9,200! That is 153% profit in 3 days.
Obviously, these profits are not always easily "baggable" in times of tremendous volatility, especially, the one's we witnessed today. As the market goes in trader's favor, the first instinct is always to quickly take profits, leaving much of the rally go complete waste. This is the reason why I did not take the "peak of the rally" prices as my exit points; I was a bit conservative here.
Trades work that way. One cannot be too greedy, because these rallies do fade after the inevitable exhaustion point is reached. Big currency investors buy or sell only to a certain point, and they still maintain a good inventory of the currencies not in favor at any given moment, for example, USD at the moment. However, I still think this rally in risk assets will continue, simply because, now, the central banks around the world want to avoid another "global slow down" due to the problems in european sovereign debt market. That said, this move from the central bankers is an indication that the banking problems in the EU is quite severe. Moreover, this "liquidity" action is to help alleviate interbank lending problems and that does not necessarily address the "solvency" issues of debt-ridden EU countries. If the yields of Italian and Spanish bonds continue to rise in the coming days, this rally will be a very short-lived one.
So, be careful out there.
Wednesday, November 30, 2011
Saturday, November 26, 2011
FX Markets: Time to get back on "Risk" Currencies?
European situation just got worse last week. Chancellor Merkel's reluctance to embrace euro-bonds caused further flight away from risky assets into safe haven assets. USD has been the biggest beneficiary of this latest risk aversion in the markets.
Euro/dollar is hanging by the thread; it is about to break below $1.32. FX pundits see Euro capitulation and a retest of 2011 low of $1.28. Lack of consensus among EU leaders in terms of providing further liquidity to troubled nations--Italy, Spain, Portugal, Greece--may expedite this precipitous fall.
While I don't want to be heroic here and put a "long" position on euro/dollar, I think, it is unlikely that euro will see further decline and may in fact, bounce back violnetly. My rationale behind that thesis:
1. There are too many "euro shorts" with a finger on the "buy" button, if "behind-the-scenes machinations" lead to a substantial liquidity provision to this rapidly worsening debt markets in Europe.
2. USD is only a safe haven currency in times of crisis, and fundamentally is not that strong.
3. There are many central banks, China including, who in the recent past made strategic decision to diversify away from USD into euro, as Fed's QE 2 flooded the banks with dollars. These central bankers will be keen on protecting their investments, as opposed to going back to the USD, which is fundamentally on a long-term decline due to worsening fiscal situation in the US.
4. At least in the near-term, the EU leaders will not allow the disintegration of the EMU and the common currency. Collapse of euro-zone could have a cataclysmic effect on global economy and financial markets. So, even though, most analysts feel that EMU will see some kind of re-structuring, there will be every effort to delay this inevitable event, and let the markets digest this eventuality in an orderly fashion.
So, I think Euro will bounce back to $1.36 in the first week of December. But, I am more interested in other currencies that are being clobbered along with the euro. I would prefer the following trades if the "bloodbath" continues next week:
Buy AUD/USD right around $0.9650 - despite China slowing down, commodities such as gold and silver will find buyers and Australia will benefit from that
GBP/USD has declined quickly to $1.54 level from a very recent high of $1.61. UK is implementing it's own version of QE, however, they are also one step ahead of the US in terms of dealing with their fiscal situation through austerities. I would buy it between $1.52 - $1.54 and ride it all the way to $1.60.
I have had reasonable success trading another "risk currency"--Norwegian Krone (USD/NOK pair). In recent days, NOK has declined by nearly 4,000 pips to 1USD = 5.93 krone. I will be perfectly fine to short the pair (forecasting a rally in NOK) around this level all the way to NOK6.00. I would do it in small increments (few short positions foe every 150pip appreciation in the USD) and put a stop-loss at 1USD = NOK6.0200.
I think the Chinese, the US Fed and Germany & France will step in to prevent a massive shock to global markets and specifically, prevent upheaval in the FX markets. It could happen in a week or two and then the "risk-on" trade will flourish until the year end.
Of course, all forecasts are mere predictions based on "knowable" variables while "black Swans" lurk in the shadow. That's something I have clearly understood ever since I humbly accepted Nassim Taleb as my Guru. Nevertheless, it is too early for the world leaders to accept defeat in the hands of the gigantic "debt beast" that is gradually swallowing profligate nations. The destruction will come in massive scale, but in the meantime, there are opportunities to execute profitable trades, as the waves of optimism and pessimism persist in the FX markets.
Euro/dollar is hanging by the thread; it is about to break below $1.32. FX pundits see Euro capitulation and a retest of 2011 low of $1.28. Lack of consensus among EU leaders in terms of providing further liquidity to troubled nations--Italy, Spain, Portugal, Greece--may expedite this precipitous fall.
While I don't want to be heroic here and put a "long" position on euro/dollar, I think, it is unlikely that euro will see further decline and may in fact, bounce back violnetly. My rationale behind that thesis:
1. There are too many "euro shorts" with a finger on the "buy" button, if "behind-the-scenes machinations" lead to a substantial liquidity provision to this rapidly worsening debt markets in Europe.
2. USD is only a safe haven currency in times of crisis, and fundamentally is not that strong.
3. There are many central banks, China including, who in the recent past made strategic decision to diversify away from USD into euro, as Fed's QE 2 flooded the banks with dollars. These central bankers will be keen on protecting their investments, as opposed to going back to the USD, which is fundamentally on a long-term decline due to worsening fiscal situation in the US.
4. At least in the near-term, the EU leaders will not allow the disintegration of the EMU and the common currency. Collapse of euro-zone could have a cataclysmic effect on global economy and financial markets. So, even though, most analysts feel that EMU will see some kind of re-structuring, there will be every effort to delay this inevitable event, and let the markets digest this eventuality in an orderly fashion.
So, I think Euro will bounce back to $1.36 in the first week of December. But, I am more interested in other currencies that are being clobbered along with the euro. I would prefer the following trades if the "bloodbath" continues next week:
Buy AUD/USD right around $0.9650 - despite China slowing down, commodities such as gold and silver will find buyers and Australia will benefit from that
GBP/USD has declined quickly to $1.54 level from a very recent high of $1.61. UK is implementing it's own version of QE, however, they are also one step ahead of the US in terms of dealing with their fiscal situation through austerities. I would buy it between $1.52 - $1.54 and ride it all the way to $1.60.
I have had reasonable success trading another "risk currency"--Norwegian Krone (USD/NOK pair). In recent days, NOK has declined by nearly 4,000 pips to 1USD = 5.93 krone. I will be perfectly fine to short the pair (forecasting a rally in NOK) around this level all the way to NOK6.00. I would do it in small increments (few short positions foe every 150pip appreciation in the USD) and put a stop-loss at 1USD = NOK6.0200.
I think the Chinese, the US Fed and Germany & France will step in to prevent a massive shock to global markets and specifically, prevent upheaval in the FX markets. It could happen in a week or two and then the "risk-on" trade will flourish until the year end.
Of course, all forecasts are mere predictions based on "knowable" variables while "black Swans" lurk in the shadow. That's something I have clearly understood ever since I humbly accepted Nassim Taleb as my Guru. Nevertheless, it is too early for the world leaders to accept defeat in the hands of the gigantic "debt beast" that is gradually swallowing profligate nations. The destruction will come in massive scale, but in the meantime, there are opportunities to execute profitable trades, as the waves of optimism and pessimism persist in the FX markets.
"Complexities of Change" A short tale
Saturday mornings are relatively laidback for me. I spend lot of time reading things that really keep me relaxed. Today, I got this email from a dear friend of mine with an attachment--"Tales for Change" by Margaret Parkin. And, as soon as I read this really short tale on "complexities of Change" (author narrates this story originally in another book called, "Tales for Coaching"), I decided to immortalize it by posting it on this blog. Here goes the tale and commentary, verbatim, by the author:
...tale of two caterpillars who, whilst sitting together on a cabbage leaf, suddenly hear a swishing noise, and look up to see a beautiful butterfly flying overhead. The first caterpillar looks at the other, shakes his head and says, 'You'll never get me up in one of those things.
Author, further comments:
This tale is a powerful tool for illustrating the complexities of change--the resistance to the idea of transition, the ability to see oneself in another dimension and the inevitability of change are all contained within the metaphor.
...tale of two caterpillars who, whilst sitting together on a cabbage leaf, suddenly hear a swishing noise, and look up to see a beautiful butterfly flying overhead. The first caterpillar looks at the other, shakes his head and says, 'You'll never get me up in one of those things.
Author, further comments:
This tale is a powerful tool for illustrating the complexities of change--the resistance to the idea of transition, the ability to see oneself in another dimension and the inevitability of change are all contained within the metaphor.
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