Risk Off !
Led by a downgrade of Portugal the markets were shaken today. All Emerging Markets were under a lot of pressure as traders looked to exit risk. Lets face it, first Greece now Portugal which country is next, Spain. Certainly the market did not look at this as a positive and proceeded to crush the Euro and sell anything remotely EM related. Since I started my new job I have noticed how everyday the market tried to sell Emerging Market currencys only to have to reverse course by the end of the day. The inflows were just to powerful. Stocks followed a similar pattern, selling off only to rally later in the day. These moves have been slight but a consistent theme. Todays news reversed all this and and sent the markets off. I saw consistent exiting of positions and new (short EM) positions being instituted. I see more follow through in the coming days.
Euro, I have been harping on this one for a long time, SELL EURO. Europe is a mess and the U.S. is doing better. The Dollar has to do better in this in this situation. The EM meltdown will be temporary, basically cleaning out some positions before we can head lower but the lower Euro is here to stay.
Brazil has a rate announcement this week and talk on the street is that they were going to raise rates 75bp. Will this change in sentiment have a change in this view? Talk on the desk was another meltdown tomorrow and possibly the CB only goes 50bp. I do not buy this and look for 75bp. Also look for Usd/Cop and Usd/Clp to open higher tomorrow. Both of these currency pairs rebounded in the early afternoon just before the official close. Stocks came off and the Euro finished on the lows which should result in a very weak opening tomorrow.
Good Luck and Good Forex Trading
Asia Calling….
As I wrote about a few days ago, I started a new job. Although I am still trading Emerging Market’s the focus has changed to Asia from Latam and FX from Rates. I am still involved in the others just not quite as much. This new roll is also much more intense and as such will probably have more insight into what is happening. This week was very interesting. There was talk earlier in the week of “strange things happening with onshore China.” Speculation amongst traders was that they were getting ready to revalue the currency possible as soon as this weekend since it was a G20 meeting. As it turned out it seems to have been more an issue with onshore Dollar funding which caused the on/off shore interest rate differential to collapse then an imminent change in FX policy. A report out today has Zhou talking about keeping a Relatively Easy monetary policy as the recovery is still on tentative ground. “tentative ground” when they are growing at 11.9%, amazing.
For the week there was a definite buying interest in outright Usd/China from hedge funds. Clearly they did not think anything would happen this weekend. Also a steady flow of selling Dollars against the rest of the region as the market looked for a stronger recovery in Asia. I am looking for Usd/Krw to take out 1100 early in the week (how about by the time I walk in Monday morning?). Usd/Idr trading 9010 currently with strong buying interest. Although I think the market wants to take it lower it might be difficult to stay below 9000 as the CB does not seem to favor such a move. Investment banks seem to think differently as they were constant sellers throughout the week.
As for the Euro, it has a problem. Greece is a mess and they are only the beginning. SELL THE EURO ( ok I have said this many times before) but I am convinced that we will be near 1.2000 by the end of the summer. Sell it against any EM currency you want. The two combined should provide a good bang for your buck. Friday was a traditional short squeeze and I think the rally will be short lived.
Good Luck and Good Forex Trading.
The probe into Goldmans “fraud”
On Friday a story came out that the SEC was suing Goldman Sach for creating investments that they knew would lose value. These products in the sub prime mortgage area were designed to go bust. Amazing! Ingenious? Criminal??
The banker at the center of this case is Fabrice Tourre who has worked at the investment bank since Late 2008. Can one man perpetrate such a crime? Where were his bosses during this? Clearly this was still when the industry was on the ropes and Banks were under tremendous scrutiny (more then now). Why would someone take the chance of doing something that could be seen as even remotely unethical (forget illegal).
As I have written many time before, where there is smoke there is fire, so no thing here will surprise me. This highlights the ability of people to forget the past and repeat it. Goldmans claim to have lost money on the product means little to me. If a customer is able to make substantial money on it (John Paulson?) then the payback can come from another transaction somewhere else in the organization. I have heard many times in my career “we need you to make an excellent price for XYZ customer, if you lose money he will pay us back on a different transaction”. Nothing illegal, just some deals are more competitively priced then others. In a case like this lets say Goldman creates the product in question. They know that it will (should) lose value. I explaining the product to a customer (say John Paulson) they see that it is not a very good and decide to take the position to short it. The deal goes as planned and the customer makes loads of money. For providing the opportunity to see this deal they customer gives Goldman a series of “at best” deals to execute. Did Goldman lose money on the original deal, possible, but they made something on the subsequent “at best” orders. The losers are the people who did not recognize the the original deal was not going to succeed (weren’t told?) and purchased it.
This is all speculation on my part but if it is proven true it shows that people forget the sins of the past quickly and are once again driven by the almighty Dollar!
CLICK HERE to read the article from Times online.
Good Luck and Good Forex Trading
The Road to Recovery
In the last few days I have seen a few articles pointing to a recovery in the markets. Yesterday there was one in the WSJ talking about the recovery being more robust then previously expected. This morning there are a few more, a front page article about the Tech industry Tech Sector in Hiring Drive and a few more in the Money & Investing section. The article which caught my attention was the one entitled Small Banks see Recovery a Bit Farther Down Road.
Definitely worth taking a minute to read it. Hearing that smaller institutions are slower in the recovery process does not surprise me in the least. Larger financial institutions are paring back businesses and concentrating on what they did well. This gives them a big advantage over new comers to the market. At the bank that I just left they were in the process of developing a platform to trade and market U.S. Dollar securities. This market is very deep and in the past has been very profitable for Banks. But trying to break in when the established players were “circling the wagons” so to speak has proven to be very difficult. I feel that they will ultimately fail. Think about it from an individuals perspective. At the height of the crisis many Americans were concerned about their money being in a bank. I know of a few people in my office who actually went to the bank and took large sums of cash out to keep in their homes. Others purchased metals in the event of a total meltdown of the financial and social systems. A friend of mine who is a branch manager of a major retail bank told me that a lot of money was being taken out by customers and placed into safe deposit boxes. Also in light of the Madoff scandal (and many more like it see Crime and Punishment) many people want to be sure where their money is. How many people thought their money was secure only to find out it was actually in some sort of a ponzi scam or in a “guaranteed note” which was actually tied to mortgages? Do you want to take that chance with a small bank? For all their problems, the big banks were bailed out by the Government so the backing is there and at least eventually you would get your money. This is the obstacle that small banks must over come. Part of their allure was that they were part of the fabric of the community. Lending to local businesses and sponsoring the little league parade. If they cannot do that they will struggle for customers. As the recovery takes hold smaller institutions will improve, as will the smaller “mom and pop” stores along the downtowns. But for now look for the biggest and fastest recoveries from the large names that we all know and love.
Good Luck and Good Forex Trading.
Focusing on the Big Picture
For the last few weeks I have been on Garden Leave as I am in the process of switching jobs. During this time I have seen the markets from a different angle. I have always considered myself a fundamental trader. As I have said many times in the past economies do not turn on a dime (except usually during a crisis) rather they are like ocean liners requiring an extended time to stop and start. I always couple this approach to the market with an open mind and try to get the daily “feel” for the market to attempt to scalp a few points throughout a day. Occasionally catching a reversal/profit taking against the overriding direction of the market. Since I am not on a trading desk now, the “feel” trade does not exist and I can see why independent traders use technical analysis as a major source of making decisions. Technical trading has never been something that I have been successful at. I have tried many times to incorporate it into my trading as I am a numbers guy and think that there is definite benefit from approaching the market this way. Unfortunately I have just not hit on the correct formula (for me) yet. But I continue to try! This brings me to the point of this post FOCUSING ONTHE BIG PICTURE.
I have become more convinced during my time off that the Economy is turning. Things are getting better. Sure employment is lagging but it has always been a lagging indicator and will continue to be that way. Stocks are very bid and people afraid of missing the boat will jump in. Financials are a big play in my mind. I have been long CitiBank for a while and am going to hold. Bank of America, Allied Irish and Met Life are also part of my holdings (unfortunately half are from pre credit crisis and half post) as well as Freddie Mac and Frannie Mae (although I am seriously rethinking these). Although these holding have not been overly profitable (yet) I truely believe that they will benefit strongly during this recovery.
As for currencies lets start with the Euro. It has rallied in my face the last couple of weeks and I have been wrong but I maintain my opinion that it is overvalued and will be lower (1.2000ish) by the end of the summer. Yes it is easy to sit back and say this with no position but I think the point is if you have the overall direction of the market correct (based on fundamentals) and your pockets are deep enough then you can ride out these storms. When I first started trading I was questioning an older trader on how to be successful. He said you need to maintain your chips (a poker reference). You cannot win a poker game unless you have chips to bet. Made a lot of sense to me. On a trading desk you have a stop loss for the day and the month. If you trigger it your manager will usually ask you to pare back trading (possible cut you off totally). This is the same for an individual trader except that it is your own money dictating the levels where you need to stop. Maintain your chips and you always have a chance. Positions should be big enough to achieve your goals but realistic based on the amount of capital you have. Sure everyone wants to make 300-400k per year but if your capital base is 10k is it realistic? Probable not. I think it is more useful to look at rate of return and not actual profits. As for FOCUSING ON THE BIG PICTURE it is pretty clear to me. The Economy is doing better and as such so will the Dollar. As America does well so does Emerging Markets so selling the Euro against EM is the play!! Selling against Asia with the Singapore Reval and a Chinese Reval constantly being speculated seems like a win but you will need time and patience (and make sure your pockets are deep enough).
Let me know what you think
Good Luck and Good Forex Trading
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