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.
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