FX Thoughts from Capricorn

EUR - Can we trend lower now ?

2011-09-19T15:14:00.000+02:00

The spike high on EURUSD immediately after the SNB announced a minimum rate of 1.20 for EURCHF on Sept 6th was not retested. Instead the market fell away very quickly, consolidated the day after (Sept 7th) between 1.3986 and 1.4150 and then trended lower for three sessions down to 1.3495.

A similar picture seems to be unfolding here.
Thursday’s high was 1.3937. This is also where the trend across the highs came in on the intraday charts
We did not manage to retest Thursdays high. On Friday we consolidated and this morning we have gapped down. Trend resistance now comes in just below 1.3850
Given the underlying concerns with Europe, we believe the overall trend in EURUSD is still down (just like it was at the beginning of Sept) and the spike high seen on Thursday was corrective.
Overall we believe the downtrend has resumed and a move to the 1.3150 target is now on the cards.

SNB Peg....

2011-09-06T20:19:00.000+02:00

1) If one takes as the starting point the recent absolute 1.01 low on EUR/CHF, the SNB has already had a greater impact on Swiss franc in recent weeks than it did during the entire 1978/79 episode of currency targeting. Then the SNB managed to depreciate CHF by a maximum 17% versus the DEM (10% of which came in the first two months following the announcement of the currency ceiling). Through its money market operations and more so this morning’s announcement and outright intervention, the SNB has managed to create a sense of shock and awe which has weakened CHF by 19% from its highs.
All well and good. Bear in mind, however, that the natural flow into CHF is currently much greater than it was in 1978. Then Switzerland’s current account surplus was only 2.4% of GDP; currently it 14% of GDP. In addition, there is still an uncertain volume of CHF funding trades that could be unwound – this most certainly was not a feature of the 1978 landscape. In short, the SNB has achieved a bigger bang for its buck than it did in 1978 even though the underlying demand for CHF is far stronger and the capacity of the SNB to absorb this inflow through its balance sheet far weaker. This reinforces my observation from earlier that the credibility of the currency ceiling cannot be taken for granted and the SNB will likely be called upon to demonstrate its commitment to unlimited intervention, perhaps not now but certainly in coming months. The SNB is pursuing a high risk strategy.
2) There is some market discussion that the SNB will need to recycle any euro intervention back into dollars to maintain a balanced portfolio and that this recycling could well depress EUR/USD. The SNB's current reserve mix is 55% EUR, 25% USD, 10% JPY, 4% CAD, 3% GBP and 3% other. The SNB did diversify from euro reserves followings its abortive first round of intervention that lasted from spring 2009 until June 2010. The diversification, however, happened only with a lag (Q3 2010). So yes the probably will wish to diversify its fresh euro purchases but there is no requirement for it to do so immediately, or indeed even soon, or indeed even at all. I don't think this should be seen as a negative factor for EUR/USD, at least not yet. The SNB will not after all wish to counteract the effectiveness of its intervention in EUR/CHF by simultaneously selling EUR/USD.
3) What underlying assets will the SNB buy? There has been some discussion that the SNB should make a point of buying peripheral debt – in easing the Euro zone’s debt crisis the SNB could contribute to an easing in the underlying tensions that have propelled CHF higher. This is a superficially attractive proposition but one that we doubt will gain much traction with the SNB’s reserve managers, for whom even GBP has proved to be too risky an asset to own. A story in the FAZ yesterday, covered also in the WSJ, claimed that the SNB would confined its purchases to German and French paper, a concentration which seems entirely reasonable for a central bank that lacks the balance sheet strength of its Asian counterparts to justify a flyer on peripheral debt.

FOMC...

2010-11-03T12:10:00.002+01:00

Book a lunch, round of golf, go shopping, whatever you like but be at your desk at 1815GMT for the main event - probably the most talked about FOMC ever. The extent of QEII and whether there is talk of a further sequel will determine USD direction for the remainder of the year. We are not far from the 1.4160 previous high and we would expect a dovish outcome to see us explode through there. Alternatively a conservative outcome will disappoint the USD shorts out there and dampen global risk appetite - a move through 1.3860 and a test of 1.3730 should result.

EUR is breaking ?

2010-09-28T21:01:00.000+02:00

We have finally cracked the 50% Fibbo of our recent move(1.5144-1.1876) that comes in at 1.3510 and have seen a decent follow through so far. As I noted last week, the DXY broke down through its 200w moving average now at 80.03, see below. I think a decent target for this EUR move, assuming we can close above this fibbo level, would be the 200w moving average in EUR at 1.3915, which coincides with the 61.8% fibbo of the move at 1.3896. Beyond the 1.39 area, I think we look for 1.4200 which would roughly equate to a test of the trendline in the DXY I have highlighted below coming in around 75.50.

This story is a classic one of traders being frozen (including myself...) The market is full of participants who have hesitated at buying EURs on the 1.32, 1.33, and 1.34 handle because these are the same players who were short their EUR 10 big figures lower, and are worried about the EXACT SAME headline risks....which to me means this move will continue.

Stay long EUR, with a target of 1.39 in the next couple of weeks, or even sooner is ISM on Friday is lower, and is the nail in the coffin for the FED's next round of QE.

FX Vol & the Worldcup, research from Nomura

2010-06-15T10:58:00.001+02:00

Source: Nomura Global FX Research

Clearing up FX volatility in the World Cup

We examine how FX volatility is impacted by the World Cup tournament

We examine the relationship between FX volatility and the World Cup. Using the 2006 competition period for comparison, we find that historically, daily FX volatility declines as the World Cup tournament progresses. Furthermore we note that during matches, intraday volatility is generally slightly lower at most by 0.1-0.2 vol points.

Introduction
It seems a reasonable hypothesis that any market participants who are following the World Cup games are likely to be less active in the market during the period of the tournament. Indeed our Macro Strategy team's research suggests that market volume tends to be lower during World Cup months (Macro Chart Alert: Hoping for a quiet World Cup? 11 June 2010). Hence we might expect market volatility to be lower, given that liquidity is lower. Generally volatility tends to be concentrated around the times of the day which have the highest levels of liquidity. Exhibit 1 shows the average five-minute rolling volatility of some major FX crosses. We note that the periods of elevated volatility are also the times when liquidity is highest, when New York and London are both trading. In addition, we note the spikes in volatility that are associated with data releases (e.g. 1330 LDN time for US data and 0930 LDN time for UK data).

However, is this apparent in the data? As a first step we have calculated the average hourly realised volatility (using 1 minute data) of EUR/USD since 2005 during the month of June. We note that in World Cup years, realised volatility has declined steeply in June (2006 and 2010). In the other years, realised volatility did not decline through the month. Hence, it seems difficult to attribute this fall purely to some seasonal FX relationship.

Intraday volatility during matches
Delving further into the data, we have calculated the hourly FX realised volatility during World Cup games in summer 2006 that were played on weekdays (again using 1 minute data). We have split our calculations into the first hour of play (including half-time) and the second hour (including post-match interviews, etc). We have reported our results as a volatility ratio divided by average volatility over the day. We find that during games the volatility ratio is usually slightly below 1. However, the difference is very small, at most 1-2% of overall volatility (i.e. if volatility is around 10, this would equate to 0.1 to 0.2 vol points lower). This is despite several of the games being played during the time of day when there is most FX volatility (between 1300 and 1600 LDN).

Conclusion
We have noted that in World Cup years volatility has fallen during June (in contrast to non-World Cup years). Furthermore, intraday volatility is at most 0.1-0.2 vol points lower during World Cup games played on weekdays.

Hammers & Hanging Men...

2010-05-26T10:39:00.002+02:00

Hammers, hanging men, and dojis are forming in various chart patterns according to technical analysts colleagues. I can’t elaborate in more detail on what these ‘’funny names’’ technical indicators mean in detail, but google is a good tool to find much more on these indicators ! To make a long story short: the above mentioned patterns are all suggesting a trend reversal ! A trend reversal in the eurusd down move as well as in some selected cross/yen currency pairs.
Equity colleagues are telling me that in their market a massive global short covering is about to happen as well and pretty soon. There are quite some expectations that part of this short covering will start ahead of this month-end. Whether it is related to the fact that there will be more regulations in general or because the German short selling ban might be copy-pasted elsewhere or because consumer confidence is picking up is unclear. Such an equity rally would most likely trigger some short covering in eurusd as well as in some selected cross/yen currency pairs.
This brings me back to the never ending conflict of interest. Shall I catch the correction ? Shall I stick to the trend ? What if the correction is a trend reversal ? These three questions will never go away. There are more questions: How much of the bad things are in the price ? Aren’t we a little bit in a hysteria and things are actually better than they seem ? Are current valuations a ‘’once in a lifetime’’ opportunity to buy cheap ? I always struggle with very clear cut answers. Markets tend to remain ‘’irrational’’ for longer than we sometimes anticipate.

AUTCH-Markets looking ugly....

2010-05-06T20:20:00.001+02:00

A quick look across markets does not paint a pretty picture:

- FX flows this afternoon: We have seen only USD buyers here with the flow concentrated in GBP, AUD, CAD, BRL. Other flows are all risk reduction and we have seen a large buyback of eurgbp from 8470 up to 8505 thru the fix. EURUSD still heavily offered on rallys. USDJPY suffered heavy stops through 93.00 to print 92.10. EURJPY low has been 116.59 (-3% on the day), while AUDJPY, NZDJPY and CADJPY all have broken through very decent technical supports.
Trigger ?
Sovereign world has very badly react to the lack of aggressive steps from ECB and so despite a very good auction on the 5yr Spain and France. Spain 10y is now trading at 4.40% or 163bp spread with Bund. Greece 10y cash is trading at 71.90 down 4.1 points today.
EURO
EURUSD low has been 1.2655 and trades with Eurostox and S&P. The latter went briefly under 1150 but is now squeezing to nearly 1% from the lows.
Here is a quick note from John Noyce on EURUSD :
EURUSD - Extrapolated ST target/support based on weekly %age change
“The largest weekly close basis down move on EURUSD ever was in late October '08 where the market dropped 5.86% on the week. If you extrapolate out that size move to now it puts weekly close basis support at 1.2515.”
- EMFX: EMFX comign under a lot of pressure. We have seen large selling of Latam, NJA and CE3. The whole EM complex is seeing selling pressure as macro aggressively dumps its positions.. we still have not seen large participation from real money although they are certainly not fading these moves
- FX Vol: really getting close to a broken market in some crosses. G10 liquidity is very bad and patchy even in majors. Liquidity has completely died out in EURCHF and EURGBP and others are starting to deteriorate as well.. All vol markets are basically Bid, illiquid and wide. Unsurprisingly any kind of EUR put seems to be bid through the roof.
- Front june Euro$ futures getting smoked (EDM0) now off 11bps. basically there is a lot of worry that banks will stop lending and libor will blow out again so very front of futures curves getting hit in euribor/euro$ and stg
- New highs in Bunds again! and the yield on the schatz is below 0.50%. Peripheral europe under extreme pressure (so much for the 'good' spanish auction earlier). Italian BTP futures are off over 2 points today.
- European banking stocks have taken a severe pasting today.. off anywhere between 5-10%

EURUSD…have we reached the point where the switch flips?

2010-04-28T21:56:00.004+02:00

• As the Eurozone crisis has moved to a new level this week with bond spreads blowing out on a wider basis than just Greece the one thing that is very notable is that EURUSD is at 1.3140. Why is that notable? It is notable because after a sharp move lower from 1.4580 in January EURUSD hit 1.3443 by 19 Feb.
• On 19th Feb the Greek 2 year yields were at 5.58%, 10 year yields were at 6.46% giving us a slightly steep curve at +86 basis points. That curve is now at over 600 basis points negative. Portugal’s curve has gone from +275 to +44, Ireland from +290 to +150 etc. In addition we have seen Greece downgraded to junk and Portugal and Spain now downgraded.
• 2 months late we are still waiting for “the package” from the Eurozone as they initially thought the suggestion of “the package” might be sufficient to calm things down. (A similar misconception to that had by Hank Paulson and his “bazooka”)
• Yet despite all of this EURUSD is just 3 big figures lower in the subsequent 2 months.
• Are we getting sucked into the scenario of believing that a deteriorating crisis automatically hits the currency???
• Reference Japan in the early 90’s as the economic downtown of an export driven economy with too tight monetary and fiscal policies sent USDJPY down from 160 in April 1990 to below 124- 6 months later and ultimately to below 80 by 1995.Why ? Because the domestic deterioration caused losses and balance sheet problems. These were partially addressed by repatriation of overseas assets and the emergence of a multi-year bull market in JGB’s (Japanese Government bonds.) in a flow to safety
• Reference the U.S. in the middle of 2008. As the crisis intensified EURUSD initially hit a trend high of 1.6040 on 15th July. The market (ourselves included) remained of the view that the bad backdrop was bad for the USD and we would head higher still.Then the switch flipped. The losses that developed on U.S. assets caused a demand for Dollars and the safety of Government paper. At that point U.S. 2 year Govt. Bond yields were at around 2.50%. (Steep to Fed funds by about 50 basis points.) By October-2 year Govt.bond yields had gone to 1.5% , EURUSD had fallen to 1.2329 and the Fed re-started the easing policy that had paused at 2%. It was not about a” LOVE” for Dollars. It was a “DEMAND” as financial market losses caused a flight to “Quality”
What is the flight to quality now????
• German fixed income- The Quality bond market in Europe. 2 year German bond yields are inverted by 21 basis points to ECB rates while those of the “PIIGS” range from +85 basis points at best (Italy) to +15% at worst (Greece). All along the curve the bond markets of these countries are significantly underperforming Bunds and causing painful losses for their holders.
• EURO: Bear with us on this one.
• Either the immediate bailout for Greece stabilizes the situation and is moderately good for EURUSD (Reasonably high likelihood)
• Another possibility is that it all dies down and all the spreads of the other countries start to plummet causing a wash of cash to chase yield and demand for EURO (PIIGS can’t fly)
• The big danger is that we are just moving from denial to delusion. Having been in denial that they would have to provide maybe EUR30 billion to Greece the EU will now likely come out with a package that provides EUR30-40 billion this year and “promises” “if needed “ for more in 2011 and 2012. Now we are “chasing the game”. If 2007-2009 showed us anything it was that once you are reactively “chasing the game” (Fed ,treasury and congress) the bar to get back “in front of the problem” has become way higher even if at that stage your reaction has become elevated. In the U.S. situation it was only a massive fiscal package, zero% interest rates and Quantitative easing that got us ahead of the problem. (i.e. Shock and awe). At this
point there is no sign of a willingness in Europe to engage in “shock and awe” but more like a “reactive approach” to the deteriorating conditions. In addition there appears, still, to be a large amount of complacency about the deterioration developing in the other European bond markets.
• The logic for this to cause EURO demand is not, in our view, a “big stretch”
• Losses on the balance sheets in Europe on Sovereign bonds would likely cause a “demand” for EURO’s i.e. repatriation to shore up balance sheets
• Now matter how small the possibility of default and /or a break up of the Euro it makes far more sense for existing holders of European bonds to hold bunds rather than the other bonds for the incremental yield. The instruments are by definition safer and if some break up were to occur you would own the currency of Germany.
• The present dynamic of tight fiscal consolidation along with deflationary effects associated with such make real interest rates high. That is exactly a scenario for owning the bonds and currency of Germany. In the past (ERM 1) this caused domestic short term rates to rise in the weak currencies and the DEM to strengthen. In this instance it would cause the “German EURO” to strengthen (By moving into German Govt. bonds) and the non-German EURO to weaken. This is not reflected by definition in the exchange rate but rather the spiraling higher of other Government bond yields and the inverting of their curves.

1.60+ turned out to be a line in the sand for EURUSD as the “switch flipped” in 2008. The charts “beg the question” – Could 1.30+ be the point where we “flip” in the other direction?

• The 76.4% pullback of the 1.2457-1.5145 rally comes in at 1.3091 as does the trend line of the 19th Feb and 26th March lows
• A hold here would likely also create triple positive momentum divergence.

In addition major support on the weekly chart comes in at 1.3088
• This is the trend line that supports the whole bull market since it began in earnest in early 2002
• In addition a hold around here would likely create positive triple divergence on the weekly chart

Bottom line- Whether this crisis is over temporarily (Possible) or permanently (unlikely) or even if it is going to accelerate the bar for aggressive EURUSD falls from here looks high. This is especially true given how little it has fallen in the last leg of this crisis since February

That would suggest to us that until the “dust clears” owning German fixed income and by definition the “German EURO” is the likely prudent/safe have play going forward from here.

Ironically, if this were to happen and EURUSD surged higher it would likely only make things worse for Europe (export driven economy) as it did for Japan and extinguish the one bright light shining for them at this time.

If we were to get a decisive weekly close below this 1.3080-1.3090 area on EURUSD then our suggestion of a turning point would appear to be premature (At a minimum)

Gold & JPY

2009-10-07T13:38:00.002+02:00

Please have a look at the following gold/jpy chart (price of gold measured in yen and not in dollars):

It is striking to see that gold (despite being in the news headlines) has not moved anywhere really in the last 7 months or so. The story behind everything (gold, oil, equity markets, euro, Asian currencies, BRIC currencies etc.) is just dollar weakness.

It is Hard to be a contrarian....

2009-08-24T10:29:00.000+02:00

1) It is hard to be a contrarian. It is hard because going against the main stream is already quite a difficult thing. There are common wisdoms and a contrarian just does not buy them. There is a trend in place and the contrarian keeps suffering each day because ‘’the market is always right’’. A contrarian keeps asking himself whether maybe, just maybe his view is wrong and he is missing some crucial elements that the majority of the market can see.
2) From such a contrarian perspective the famous statement from Mr. Keynes comes to mind: ‘’The market can stay irrational much longer than one can stay solvent’’. In current markets that would apply to the strong rally in equity markets. This market could continue to move up for all the consensus reasons such as the belief that the worst is behind us, that the economy will pick up strongly in 2010, that China will replace the US or simply because we are entering into a phase of asset price inflation.
3) Another strong consensus view is the bearish dollar view. Every week there is a new famous person that is seeing it as an inevitable fact that the dollar must go lower. After the IMF it was Pimco then Buffett and finally Stieglitz. Tough to be a contrarian against such heavyweights.
4) The Jackson Hole central bank conference resulted in a signal that the world central banks will keep rates low for the foreseeable future. So the liquidity charged equity market rally can continue and it did so accordingly this morning. Consequently the dollar remained under pressure.
5) I am not buying into that whole scenario. The world is still leveraged. Current valuations seem to expect the rosiest of all worlds. The liquidity bonanza cannot go on like this for ever. Following my philosophy to sell when its high (and when all others are buying) I will build an equity markets short position this week (by buying puts on the S&P).
6) I am also looking to buy the dollar against the consensus view. I expect us to keep range trading until labour day (Sept 7th). If my scenario of a rather big move lower in equity market materialises, the dollar will go up on the back of this.

Time for a spurious correlation to get tested?

2009-05-25T10:57:00.004+02:00

What do we mean?
It feels like the market has fallen in love with the very questionable correlation of Equities UP EURUSD UP and Equities DOWN EURUSD DOWN
Why do we say questionable? The fact is that this relationship has worked well during the financial de-leveraging period seen between July 2008 and March 2009. However outside of that period that relationship is spurious at best. In fact when one looks back to 1995 to a period incorporating both bullish and bearish equity trends and bullish and bearish USD trends the relationship does not hold up to scrutiny.

In the equity bull market period of 1995 to 2000 the pretty close relationship was that Equities went up and the USD went up and equities went down and the USD went down. Overall during that period we had a bull market in Equities and a bull market in the USD as capital flooded in the U.S.A.
Between 2000 and 2002 as equities fell the USD also fell overall. In both markets the most impulsive part of the move came when Equities fell sharply from March 2002 to August 2002 and the EURUSD went from .8600 to 1.02.
From March 2003 to December 2004 as Equities rallied strongly the relationship broke down and higher equities also saw a weaker USD(Could it be that the move to artificially low rates by the Fed of 1% by June 2003 and held there until June 2004 provided cheap liquidity to invest around the World?)
But, then in 2005 as Equities continued to move higher the USD then strengthened. Why? There were predominately 2 reasons.

Firstly by the end of 2004 the whole World was bearish USD and short accordingly and then in 2005 we had HIA (The homeland investment act) which provided a once off benefit to companies to repatriate overseas profits at preferential tax rates. As a consequence of this once off event the USD strengthened for most of 2005.
Then from 2006 to 2008 we once again saw the USD weaken as equities went higher continuing the trend in place since 2002.
From mid 2008 we have pretty much seen the de-leveraging trade where lower equities gave a strong USD and vice versa as risk positions were unwound, credit stresses were severe and USD funding was a big issue for the Europeans
The dynamic today, however, does not seem the same as then. A lot of the USD funding stresses seem to be behind us, the TARP and the stress tests seem to have soothed the financial market concerns. U.S. interest rates are effectively at zero, the housing market remains stressed and the economic data remains poor (sometimes better than expected but poor nonetheless)
The Fed has told us (As recently as today) that the USD is back to being a full blown funding currency
• Interest rates are effectively at zero
• They do not anticipate “normal” growth for a number of years to come and have little inflation concerns.
• They contemplated an expansion of “QE” (can this backdrop really make housing or Fixed income a “bargain” i.e. why would capital now flow into the U.S.?
We are effectively printing money, engaging in massive monetary easing, engaging in massive fiscal easing, running up huge budget deficits, still running a large trade deficit. Is this a set of policies that would normally be supportive of a currency? We don’t think so.
What the chart above shows is that the relationship between the USD and the stock market comes and goes depending on what else is going on.
If we accept that the dynamics mentioned above should in normal circumstances be currency negative we need to ask what would the counter dynamic be that would create contrary excessive USD demand like we saw in the 2nd half of 2008?
If we cannot answer that question and we know over time that the evidence of a constant reliable tie between the direction of the USD and the equity market is patchy at best then it is not a stretch to believe that as we have now moved from financial de-leveraging to economic de-leveraging that the USD can move in a more fundamental fashion. If so the fundamental policies noted above are likely to weaken the USD over the course of 2009 into 2010 irrespective of whether equities rally further or indeed fall. What may differ in bouts of risk on/ risk could be the currency of choice on the other side to buy against the USD.
With the U.S. consumer retrenching, losing jobs, worried about mortgages/pensions/college fees etc and SAVING the gap in an economy 72% driven by the U.S. consumer is going to continue to require a big Government presence in monetary and fiscal policy as well as printing money
As a final note on a day when the S&P posted a bearish key day reversal EURUSD had its highest daily close in the up move from the 1.2457 March low and closed over the pivot post FOMC 1.3739 peak. In addition USDCAD closed below a major technical level at 1.1465.
It is early days but this may well be the early warning sign that the USD trade is no longer the risk on risk off trade that it has been since last July and that we may be on the cusp of more sustained broad based medium term USD weakness.

"Sell the printers"

2009-03-18T15:34:00.001+01:00

With only a few hours left until the FOMC discloses its decisions there is an interesting (short term) decoupling taking place: Equity markets are down but the dollar fails to benefit of it. This points towards more eurusd gains. It is also worthwhile to note that the market is short eurusd and eurjpy according to IMM data and this to most extreme degree of the past six months. There has also been a pickup in option trading activity with good buying demand for eurusd upside option ranging from 2 days to one week to three week tenors.
This remarkable price action confirms views of holding on to current eurusd long positions. There might be a bit of squeeze following FOMC but price action currently speaks a loud message and it is worthwhile to keep selling the printers.

Managed Futures

2009-03-03T11:49:00.002+01:00

The top performance of Managed Futures in 2008 led many investors to flood into managed futures throughout last year and into the start of 2009 chasing those positive returns. But while the stock market has continued its slide into oblivion thus far in 2009, managed futures haven’t exactly started out 2009 where they left off last year.
Past Performance is Not Necessarily Indicative of Future Results

Asset Class YTD Performance
Hedge Funds 1.09%
Cash 0.28%
Managed Futures -0.73%
Bonds -3.21%
Commodities -3.42%
US Stocks -18.62%
World Stocks -18.82%
Real Estate -36.58%

Key: YTD performance numbers are estimates as of 2/27/09 (1/31/09 for Hedge Funds) Managed Futures = Credit Suisse/Tremont Managed Futures Index, Cash = 3 mo T-Bill rate, Bonds = Vanguard Total Bond Market ETF, Hedge Funds = Credit Suisse/Tremont Hedge Index, Commodities – Reuters/CRB Commodity Index, Real Estate = Dow Jones Wilshire Real Estate Securities Index, World Stocks = MCSI World Index (ex USA), US Stocks = S&P 500 Index

As you can see in the table above, managed futures as an asset class have merely been treading water thus far in 2009.
Now, this still puts MF at the top of the table above in terms of performance relative to the more mainstream investments in stocks, bonds, and real estate; but some of the investors who have heeded the advice of Attain and others to diversify into managed futures are starting to ask where their returns went? Their asking why managed futures are seeing flat performance if volatility remains high and stocks and commodities continue their death march to zero.
Many of those early adopters who got into managed futures just as the credit crisis started worsening (early to mid 2008) saw very nice returns the 3rd and 4th quarters of 2008 with managed futures. Many of them were used to seeing week after week of profitable movement in their accounts, and after getting used to that pattern for 20 weeks or so, don’t know what to think of this new pattern of one week up, two down, one up, etc.
Others were more of late adopters – having gotten in near the market lows (until today) over the past few months. These folks find themselves in a similar mental state, having put money into managed futures as a play to try and make some money during this bear market, but seeing nothing but flat to down performance so far.
And finally, there are those who haven’t pulled the trigger yet. There are those who are waiting in cash (hopefully), or still trying to catch the falling knife of the stock market despite many gashes in their hands (and pocketbooks) and finally seeing the futility of that game. These investors may be thinking they are too late to the managed futures party.
The question on each of these groups’ minds is what is going on? And more specifically, where are the high returns we saw in 2008? Where are the gains amid the stock market losses? What will 2009 look like for managed futures?
Managed Futures are just fine, thank you.
The short answer is that nothing is going on. Managed Futures are not broken. They are not taking a break. They have not lost their status as a great crisis period investment. They are doing just fine.
What is really going on is a bit of a perception problem, in our opinion. People were used to profits week after week with their managed futures programs as moves normally seen happening over the course of a year were happening in mere days and weeks. These people now have to adjust to a more normal environment where such moves take several weeks to materialize, and that is admittedly tough to do psychologically.
The mental problem is that we just came through one of the best periods of all time for managed futures, and with that fresh in investors’ minds it is only natural to want that period of greatness to continue along indefinitely.
It’s like your team winning the Super Bowl or World Cup one year, and then just having a winning season the next year. The winning season is nice, but you constantly lament how and why they can’t return to the big game and bring home the championship. For many of us, we aren’t content to just have a winning season – we want the championship.
Unfortunately, we can’t have the championship every year. In investing terms, this means we shouldn’t expect any investment to simply go straight up and make money month after month, quarter after quarter. One of our favorite metaphors for this is ‘trees don’t grow to the sky’, and we’ve seen with the Madoff and Stanford cases that anything which does show those types of returns is probably a scam.
Risk/Reward Mismatch
It may not be all in our heads, however; as there could be a more technical reason for the flat performance over the past three months.
Many managed futures programs use some form of market volatility to size their trades and determine how many contracts of each market to trade for an account they manage. In a simple example, if a market has a range of 10 points normally, and you wish to risk 30 points per trade, you could do three contracts in that market (30/10 = 3: risk/volatility = contracts). Now, if the range of that market, which many managers equate to the possible loss or risk of that market, shoots up to 30 points, the manager may only be doing 1 contract (30/30 = 1).
This all works fine and well most of the time, when the market movement is roughly equal to the amount the market is moving on average over the past x number of days. But something unique has happened since about mid December through the end of February. That something is a risk/reward mismatch of sorts, where the potential positive return many CTAs are planning on has decreased because the average move of the markets they track has roughly been cut in half since the volatility peaks in Oct/Nov, while the average range which includes that Oct/Nov period has remained high.
In this scenario, trades are being placed right now with risk based off the highly volatile period, but profit potential is only based off the now lower market moves, which are much smaller than they were back at the peak of the crisis.
For example, each of the following markets has a 15 day average range only about ½ of what it was in late October, early November. Crude was moving about $6.75 per day, and is now averaging just $2.96. Corn was at an unbelievable 26.12 down to 12.98 now, and the Euro was at 348 a day versus 190 now.
So, while managed futures programs would usually love an environment where Crude is moving $3 a day and Corn 12 cents – when those levels are less than half what they were just two months ago, there is the potential for a risk/reward mismatch, where the risk is based off $6 moves in Crude, but the profit is linked to $3 moves.
This mismatch will work itself out in the normal course of business for systematic programs like APA and Clarke as the algorithms they use to measure volatility will put more and more weight on the market conditions we're in now, and less and less on those of a few months ago. Meanwhile, this may be part of the reason discretionary managers have scaled back their trading a bit; where a return to normally matched risk and reward might allow them to get back to business.
Where do we go from here?
So what is the outlook for managed futures in 2009? Most observers agree that we’re not out of the woods in terms of volatility by a long shot. And that should be a good thing for managed futures programs once the risk/reward mismatch outlined above works itself out. But no one knows for sure what the future holds. Volatility could rocket back up to the ’08 highs, or plummet from here down to the ’05 lows.
The reality is that any and all investments return to their mean. Managed Futures were due for a slowdown after coming through one of their best periods of all time. Perhaps more accurately, the economic crisis fueled market sell-off was bound to slow down (if it hadn’t, most assets would now be worth nothing), and with it slowing down so did the opportunity for profit for many managed futures programs (while risk remained high).
The reality and more normal pattern for managed futures is the positive gamma/option buying profile of frequent small losses interspersed with rare but more significant gains. The return stream will at best look like steps on a staircase, with moves up followed by relatively flat periods before another leg up, and at worst will resemble hilly landscapes with steep peaks and deep valleys. It will not look like a straight line at a 45 degree angle.
Unrealistic expectations are more often than not why investors lose money with managed futures. They may enter into managed futures during periods like the one we just came through, and expect an immediate return similar to the ones they just witnessed happen. But more often than not, the market may be going through an adjustment or consolidation after a large move which drove those returns, leading to a flat to down period just as the investor gets involved. This sort of negative feedback can lead to unhappiness and getting out of managed future just as the consolidation period is about to end and new moves may drive new profits. Don’t fall into the trap of getting in at the top and out at the bottom.
To ground oneself, investors should not equate managed futures with oversized positive returns every month, month after month. Even in this once in a century market crisis, that just isn’t realistic; and expecting such will only lead to the negative feedback loop outlined above. As the saying goes, Rome wasn’t built in a day, and investors need to let managers go through at least a few market cycles to see how they do. It is best to expect months of boredom and small losses with exciting spikes higher every now and then.
This isn’t the buy and hold myth perpetrated by your stock broker (a myth which seems to be showing its faults now that we are back to 1997 levels in the stock market), but it also isn’t a get rich quick scheme. It’s best to give a CTA program at least a full year to prove their worth in your portfolio, if not much longer. Generally speaking, the longer time frame your managed futures program operates on, the more time you need to give it to perform. Some CTAs may not even have all of their positions on for a few months after you start with them. Rome wasn’t built in a day, and managed futures managers can’t simply will their programs to make money. They need the proper set ups and market environment, and normally those take some time to set up.
Of course, unlike the buy, hold, and hope method – you should also have a worst case scenario “line in the sand” to get out of any CTA program in your portfolio if it breaches 1.5 times its past Max DD (or whatever level you are comfortable with). That is your protection from one program causing undue stress on the whole portfolio.
In conclusion, remember that the reason you probably got into managed futures was not just for the positive returns, but for the possibility of positive returns when general markets and economies are heading lower – for the non correlated performance.
But non correlated performance doesn’t mean opposite performance, it just means different performance. So there may be times when both go down together but at different intervals, or when both are up for the year but with one making the move early in the year and one later in the year. And there may be times like the last two months, when stock markets are reeling and managed futures are just surviving, trying not to lose too much while awaiting the next breakout moves which will fuel profits.
So don’t necessarily expect another round of fireworks in 2009. It may be a different year. You may just have to live with average managed futures performance. Of course, that’s the proverbial “ace in the hole”. Managed futures average performance is light years better than anything else going on right now, with a compound rate of return since 1980 of 13.5%, a worst losing period [max DD] of -15.6% (compare that with the current -55% peak to valley drawdown in US stock markets), and the last losing year back in 1999. [All numbers based on the BarclayHedge CTA Index. Past performance is not necessarily indicative of future results].

An average year….we should be so lucky!

NZDUSD: Watch the long term 76.4% Fibonacci

2009-03-02T20:38:00.000+01:00

o NZDUSD has tested and SO FAR held the 76.4% Fibonacci retracement of the whole bull market that started in 2000 which comes in at 0.4915 (the low so far has been 0.4912).

o A close below here (preferably on a weekly close basis) would suggest extended long term losses down towards the 0.45 area with interim supports at 0.4785 and 0.4560

o If the market bounces back we suspect it would likely reflect a USD weakness story as the NZD continues to look weak across the board.

Long EURUSD

2009-02-24T20:25:00.003+01:00

EURUSD looking set to move higher

We are going long EURUSD at 1.2825 with a stop loss at 1.2650 and a target of at least 1.33+ (55 day moving average).
The set up here looks very similar to that seen in early December prior to the sharp move higher in EURUSD.
• In late November/early December EURUSD moved lower from 1.3081 to 1.2549. This level became a platform for a sharp rally to 1.4720 over just 14 days. On 4th December EURUSD posted a bullish key day and never looked back.
• This time we have had a move lower from the 9th Feb high at 1.3095 to a low at 1.2513-almost identical to December. In addition we have broken out of the down channel from the 1.4720 high.

The asset class that thrives on volatility - Article from FT

2009-02-06T21:09:00.001+01:00

Special FX: the asset class that thrives on volatility
Published: February 4 2009 18:37 | Last updated: February 4 2009 18:37
At a time when many investment banking revenue streams are under pressure, one part of their business is booming: foreign exchange.
Senior executives are extolling the merits of the currency markets in trading statements for the first time in many years, reflecting a change in attitudes.
“FX divisions are among the most profitable in the banks. Ultimately in 2008, FX was a significant contributor to profits,” says Scott Wacker, managing director of foreign exchange sales at JPMorgan.
Traditionally, forex has been regarded as less glamorous than other bank businesses such as equities or mergers and acquisitions.
But while other asset classes are being ravaged by the financial crisis, foreign exchange desks at the big investment banks have been enjoying record years.
The reason for the upsurge in profitability has been the return of volatility to currency markets, which has seen trading spreads widen and margins for the industry’s market makers soar.
“Low volatility means a bear market for the foreign exchange industry and high volatility means a bull market,” says Martin Wiedman, head of global forex sales at Credit Suisse.
Spreads offered to investors in the pound against the dollar are five times higher than before the eruption of volatility that followed the collapse of Lehman Brothers in September last year. In the forex options market, average volatility is now almost six times higher.
It is not simply that relative currency valuations have moved to extreme levels in the wake of the Lehman collapse. The speed of intraday moves has shot up.
In the spot foreign exchange market, three-month historical volatility, a benchmark that tracks the average range of trading in different currency pairs over three months, has increased markedly.
For euro/dollar, it rose from just over 10 per cent in the three months to the collapse of Lehmans to 24 per cent in the following quarter. Meanwhile, three-month volatility in dollar/yen rose from 11 per cent to 28 per cent, and in sterling/dollar it climbed from 8.5 per cent to 22 per cent.
Mr. Wiedman believes that heightened volatility is here to stay and is unlikely to fall back to the exceptionally low levels prevalent prior to the credit crisis.
The unprecedented levels of liquidity swilling around global markets were partly responsible for keeping trading spreads tight, ensuring that currencies trended in relatively small ranges.
With the eruption of the credit crisis, that changed, however. Counterparty risk rushed to the top of investors’ agenda, damping liquidity and prompting a flight to quality trading partners.
Furthermore, a large part of the market-making community was lost as the disappearance of Bear Stearns, Lehman Brothers and Merrill Lynch further reduced liquidity in the market.
On top of that, the deterioration in the global economy sparked a wave of deleveraging, which added to volatility as investors scrambled to haven currencies such as the dollar and yen.
“The world has fundamentally changed,” says Zar Amrolia, global head of foreign exchange at Deutsche Bank. “Risk premium and volatility have risen and the value of liquidity provision has risen.”
There are several reasons that foreign exchange appears to be a good business for banks in the current climate.
First, there is little correlation between forex earnings and other parts of a bank’s business. Second, and perhaps surprisingly for a sector that is associated with wild price gyrations, forex has relatively low earnings volatility: earnings tend to be steady, growing and predictable.
Finally, capital costs are fairly low because the average duration of deals tends to be shorter than in other sectors, generally no more than one month. Forex, therefore, eats up less of a bank’s risk capital.
“Foreign exchange is a highly liquid and transparent business which typically does not involve a huge amount of credit risk,” Mr. Wacker says.
According to the latest figures from the Bank for International Settlements, forex trading volumes average $3,200bn a day, which makes forex the world’s largest financial market.
Forex trading volumes could suffer in the coming year given the capital destruction in recent months to banks’ client bases.
However, analysts say forex is unlikely to suffer as steep a fall in volumes as, say, equity markets, simply because currencies are fundamental to underlying business.
The heightened volatility means the currency exposure of international asset managers and companies will rise. In other words, higher volatility does not just encourage risk-taking; it also triggers huge hedging demand.
In any case, increased spreads are likely to keep foreign exchange profitable for marketmakers, even if trading volumes dip, bankers say.
So far, at least, there is no expansion in the industry, which is perhaps not surprising given the cost-cutting that is occurring across the banking sector.
But dealers report that while banks have been busy cutting headcount in other areas, foreign exchange has remained relatively immune.
“Nobody I work with on a daily basis has lost their job in the last six months,” says one London-based trader.
Indeed, bonuses are still being paid in the industry, even if at substantially lower rates than in previous years.
Observers say they expect the banks that have emerged from the credit crisis relatively unscathed to profit from the new foreign exchange landscape.
“If you are down and out for the count, it is not going to save you,” Mr. Amrolia says.
“But if you still have a pulse, you are going to have the opportunity to make some serious money in FX over the next couple of years.”

Best joke from the WEF in Davos

2009-02-05T10:28:00.000+01:00

Question: What is the capital of Iceland ?
Answer: About two krona.
Question: What is the difference between Ireland and Iceland ?
Answer: One letter and about six months.

I like that one.....

EUR/USD Long - Closed

2009-01-26T20:41:00.001+01:00

We choose to close our long EUR/USD from 1.2874 at 1.3148
Momentum is vaning....

EUR/USD Long

2009-01-23T20:02:00.001+01:00

We are going long EURUSD here at 1.2874 with the belief that a catch up trade is imminent.
Stop loss of 1.2725 and target of much higher…..

Qoute of the day

2009-01-21T10:02:00.000+01:00

"A weak currency arises from a weak economy, which in turn is the result of a weak government"
Gordon Brown, 1992..

Managed Futures end 2008 as top performing asset class

2009-01-11T10:36:00.002+01:00

While the final 2008 numbers are stil l a few weeks away from being tallied on some asset class indices, we couldn’t wait that long, and have compiled the following estimates of 2008 performance across the various asset classes followed by most investors. Most people only know stocks and bonds, actually; not alternative investments in commodities, hedge funds, and managed futures; so perhaps we should say the asset classes followed by readers of this newsletter.
Past Performance is Not Necessarily Indicative of Future Results.

Asset Class 2008 Performance
Managed Futures 17.59%
Bonds 2.93%
Cash 0.08%
Hedge Funds -20.72%
Commodities -23.74%
US Stocks -38.41%
World Stocks -42.08%
Real Estate -43.12%

Key: All results estimates as of 12/31/08 - Managed Futures = Credit Suisse/Tremont Managed Futures Index, Cash = 3 mo T-Bill rate, Bonds = Vanguard Total Bond Market ETF, Hedge Funds = Credit Suisse/Tremont Hedge Index, Commodities – Reuters/CRB Commodity Index, Real Estate = Dow Jones Wilshire Real Estate Securities Index, World Stocks = MCSI World Index, US Stocks = S&P 500 Index

As you can see in the table above, managed futures finished the year on a strong note, not just surviving the financial crisis which hit markets in 2008, but thriving in it with double digit gains close to +20%. When comparing that with assets like cash and bonds which just barely survived at 0% and +3%, or supposed absolute return vehicles like hedge funds at -20%, or stocks and real estate which lost nearly one half of their value in a single year – the power of diversifying into managed futures has never been more apparent. (Again, the obligatory disclaimer that past performance is not necessarily indicative of future results)
Just how powerful is this diversification? Imagine a US stock portfolio in 2008 which had 20% of its value in managed futures. The portfolio containing managed futures would have lost just -27%, versus the stock alone portfolio losing -38%. That may seem like cutting hairs as they were both still down significantly, but the portfolio including managed futures would have lost about $110,000 less on a million dollar portfolio, for example. I don’t care who you are, that is still a significant amount of money, and that is still enough for a year of college, or perhaps not having to postpone retirement another year, and so on.

19 Dec 2008 - Market Comment

2008-12-19T09:43:00.001+01:00

Comment:
1) As a Swiss/Danish person it seems to me that there has never been a cheaper time to go for a xmas-shopping trip to London or to New York: Flight fares are cheap given the steep fall in kerosene prices, deflation is hitting the big apple with discounts up to 50% at 5th avenue and Times Square and the usdchf rate trading close to all-time lows. The same is true for London. Pound Sterling / Swiss Franc trading at 1.62 makes me think to buy one of the English football teams; from what I hear they are looking for new investors given the Russian Oligarchs and the Iceland tycoons are struggling...
2) I am aware that using purchasing power parity as a guideline to trying to figure out where FX rates are heading has its flaws. But I still don't neglect them. Whilst I see the dollar as really 'cheap' I view the pound sterling as 'getting closer to normal' and hence don't think that we have seen the end of the slide as of yet.
3) The ECB lowered deposit rates by 100 bp yesterday in a move that could be described as ''technical''. Mr. Trichet also mentioned FX. He did not use the strongest words but clearly the rapid move is of concern.
4) In an interview, Mr. Stark, the chief economist of the ECB, is worried about the fact that EU member countries do not stick to the stability pact any more and that the ECB can't really tackle fiscal expansion with monetary weapons. He also noted the widening of credit spreads amongst the members. To me a real test for the euro project as a whole. Once the market starts focusing on that issue we shall see eurusd trading a lot lower.

USD ?

2008-12-17T12:25:00.000+01:00

I get asked from a lot of people if one should buy dollars. My answer is a clear yes. I have been expecting a correction of the dollar upmove and it has been delivered. To some degree it was not that difficult to call it as it was just a very extreme move in a very short period of time (that is the eurusd move from 1.6040 to 1.2330 in just three months) and a correction was due. For the same reasons I view the current move as 'extreme' and due for a correction. The Fed has just continued what they have been doing since a while. They analysed the situation and moved forward with bold measures such as cutting rates to zero and pledging to buy unlimited quantities of securities. They did not hesitate to go into uncharted territory. At the same time president elect Obama is planning a massive infrastructure program to revive the US economy. This is very similar to what Ronald Reagan did back in the 80ies. The dollar in my humble view will do the same like under Reagan. Driven by foreign investments to pay Obama's plan the dollar will rally. I am using these dips to reinstate my core long dollar position in a time when the market does exactly the opposite.

8 Dec - Market Comment

2008-12-09T10:07:00.002+01:00

O-phoria is back in the markets. President elect Obama's plans 'to provide a blood infusion' into the US economy that would result into the biggest infrastructure injection since the 1950s has turbo-charged markets. The Euro Stoxx 50 rallied almost 9% and the Dow Jones managed to move above the 9000 level temporarily. This bullish mood contrasts heavily with other current news of further job cuts and forecast cuts by a wide range of companies. We are obviously trading the future expectations and not the current situation. In such an environment carry trades did well and we had a 'wag the dog'-day where carry trades moved the majors, most notably eurusd that rallied close to 1.30. I keep viewing this as bear market rallies as we have seen this many times this year. Unfortunately there will be more bad news down the road. Many market participants however believe that the worst is already priced in and the only way is up from here. A lot of them are the same people who tried to convince earlier this year that we live in a 'decoupling' world, stating that a US slowdown is absorbed by emerging countries. We all know how that worked. Conclusion: Nothing really changed. We still don't know when we will see the light at the end of the tunnel. Markets are far from normal. In FX-land that means: keep buying dollars on dips.

The finance world one year on.....

2008-12-05T21:46:00.000+01:00

Just over a year ago Royal Bank of Scotland (RBS) paid $100bn for ABN Amro (80% cash).

For this amount, RBS could today buy:

Citibank $22.5bn,
Morgan Stanley $10.5bn,
Goldman Sachs $21.0bn,
Merrill Lynch $12.3bn,
Deutsche Bank $13.0bn and
Barclays $12.7bn,

And still have $8bn change....

21 Nov 2008 - Market Comment

2008-11-21T09:49:00.000+01:00

We live in unusual times. There is more evidence almost every day. There are records over records happening in the market. Most current ones are the moves in the US Treasury markets where yields reach unprecedented levels and in US equity markets where the S&P 500 has its worst year ever. Financial stocks keep bleeding around the globe. Yesterday's SNB rate move has been unusual, too. It has been an inter-meeting cut. It has been a 100 point move. I wonder about the timing. In three weeks there would have been the regular meeting. And a mere three weeks ago the assessment resulted into a 50 bp cut. So why the hectic ? There has not been a material change of the environment. We knew that we are heading into a recession, we knew the oil price is substantially lower, we knew that the US job market will suffer. I hope the motivation has been to show the world that the SNB is independent and not because there is something bigger looming around the corner. Conclusion in any case is: sell the Swiss Franc. We witnessed again a horrible day in World equity markets and the chf did not move higher. Price action speaks very loud. So I remain short chfjpy. I also keep my long usdchf, however I am cautious to add. Looking at recent eurusd price action some alarm bells started to ring. We might be vulnerable to see a spike in eurusd. I am not excluding a technical move back towards the 1.3200 levels there.

EUR/USD short term tech..

2008-11-14T14:18:00.002+01:00

Please see the two short term eurusd charts attached. Both show the same: we have built a triangle formation over the last few trading session which has been broken to the downside earlier this week. Last night we have seen a retest of the breakout line at 1.2855 and turned lower again.
We are at an important crossroad just ahead of the important G20 summit: a move below 1.2390 would trigger a move sub 1.2000 ; a move above 1.2920 on the other hand could destroy the bearish triangle pattern and actually draw the attention to a potential double bottom in the 1.2350/80 zone with a potential to see a move back to 1.3450.

Carry left behind

2008-11-12T10:25:00.000+01:00

FX markets have been on a roller coaster ride since August. While our FX trend calls in the last Currency Strategy three months ago were generally correct, including the dollar's appreciation and the sell off of commodity currencies, we did not expect such a sharp decline in global risk appetite and therefore the yen's rise and emerging market sell-off. However, of greater interest is what we should think going forward. We expect market activity in the coming months to reflect three main themes. Firstly, deleveraging and unwinding of carry trades is likely to continue. While hot speculative money abandoned these trades long ago, plenty of fundamentally motivated carry positions probably remain. As most major central bank spreads converge during this period, this unwinding process will continue. Secondly, in the current still harsh environment we expect big liquid currencies to remain in demand and to enjoy a premium over their smaller and less liquid counterparts. Thirdly, the ongoing credit crunch and general lack of liquidity will benefit those countries running current account surpluses to the detriment of deficit countries dependent on foreign financing to sustain their economic growth. Consequently, Eastern European emerging market countries in particular remain vulnerable as they suffer from all three factors: unwinding of carry trades, a lack of liquidity, and current account deficits. Conversely, the yen and Swiss franc should benefit most. For other currencies including the USD the situation is more mixed although we generally expect the USD itself to continue to appreciate, albeit more slowly.

Long EURUSD ticket 0031 - Taking profit

2008-11-05T16:22:00.003+01:00

After the dissapointing ISM numbers out of the US, EURUSD has spiked up to the 1.31 level.

We prefer taking our profits and run..
Position closed at 1.3085

Long EURUSD ticket 0031

2008-11-05T15:03:00.006+01:00

EURUSD To Resume Its Bull Phase

Yesterday's price action in EURUSD confirmed an end to the recent corrective decline from 1.3299 to 1.2527. The relevant pattern is a bullish engulfing reversal that signals the pair is ready to resume it near-term bull phase. The momentum condition is favourable too in that it highlights the Euro as being in bull mode and reinforces the significance of the candle pattern i.e. price and momentum are in agreement. This relationship needs to exists for the signals to be valid. This pattern defines 1.2727, yesterday's low as the key near-term support which need top remain intact to avoid any deeper decline, so 1.2727 marks the key short-term risk. Strategy this morning, a long position was entered at 1.2835 targeting 1.3550 with stop loss at 1.2505

Highlights Nov 3rd 2008

2008-11-03T14:55:00.000+01:00

Overall: There are increasing indications that we may have entered a period of recovery / strength for major stock indices. The weekly reversal pattern we have seen and our favourite all time overlay of the Dow Jones suggests a significant low may be in place.

Foreign Exchange: USDJPY: Stretching higher in the ST and is likely to test the 103 – 103.50 resistance area in the days ahead. Generally JPY crosses may also creep higher in the ST if indeed we have entered a period of “stability” or a lack of risk aversion in the ST.

Equities: Dow Jones: Weekly bullish reversal was posted last week suggesting gains in the ST. Beyond that our 1930’s overlay is suggesting that we have put in a significant low on the Dow. A bullish weekly reversal was also posted in the FTSE 100 Index, which is likely to rally back above 5,000.

Fixed Income: Long end U.S. yields are likely to stretch higher. Key resistance levels are likely to be breached on the 30 year yields which could rally up to 5%.

Markets DO revert to long-term trend line supports....

2008-10-30T10:01:00.003+01:00

Highlights Oct 29 2008

2008-10-29T14:06:00.000+01:00

Overall: There are good ST indications that the days ahead may see a weaker USD. We continue to believe that U.S. equity markets have likely established a significant low and a rally ahead is expected. Accordingly we may see some “stability” in risk assets in FX including cross / JPY and E.M. in the ST. At this stage it is too early to determine whether this will lead to a more sustainable level of risk appetite.

Foreign Exchange: EURUSD: Bullish key day reversal indicates that a bounce is likely. DXY Index: Fails to sustain above good resistance and momentum divergence warns of USD weakness in the ST. G10USD Index has failed to breach the lows from Nov ’05. The LT chart of AUDUSD shows that the market has effectively held the long term 76.4% Fibonacci retracement of the whole bull market that started from the 2001 low.

Equities: S&P 500: Bullish key day reversal was posted and further gains are likely. Nasdaq Composite: Major long term support comes in at 1,500 and we would not be surprised to see a rally in the days and weeks ahead

Emerging markets: USDBRL: Momentum divergence warns that the uptrend is tired and that support levels are likely to be tested in the ST.

EUR/USD - Taking Profit

2008-10-29T12:29:00.002+01:00

Unashamedly taking profit on long EURUSD at 1.2819

Has very quickly reached our minimum 1.2825-50 target and made no progress overnight.

While we think it may still head higher this remains a market to take your profit and run and the present pattern could be forming a short-term double top.

Long EUR/USD

2008-10-28T22:20:00.004+01:00

Going long EURUSD at 1.2652 with a 1.2535 stop loss
Opportunistic long believing that a move to at least 1.2825-50 and possibly as high as 1.3000 could be on the cards in the next 24 to 48 hours as risk concerns are reduced.

Correlation, the only thing that rises in a falling market

2008-10-28T09:50:00.000+01:00

Correlation, the only thing that rises in a falling market

Being in the Managed Futures business - we can’t get enough of the numbers below (very scary for most, refreshing for a few), and had trouble resisting the urge to put an updated set of Year To Date performance across various asset classes .

Asset Class YTD Performance

Managed Futures 12.53%
Cash 0.84%
Bonds -4.76%
Hedge Funds -14.36%
Commodities -24.58%
US Stocks -40.29%
Real Estate -44.93%
World Stocks -45.14%

Central Bank Intervention

2008-10-27T20:55:00.000+01:00

While it is premature to draw a line and say that these moves lower are over (And quite likely they may not be) It could be time to leave some
on the table for the other guy.

We do not think the intervention risk is any longer something that is not to be thought about.(Even more so after the weekend comments)

Whether it would be successful over time is a big question given that these are deleveraging moves not a market getting "long to its eyeballs" in USD and JPY but if it happened we would expect a material short-term effect.

When a contact from U.S treasury came in to see us early in the summer (July 10th-ironically 5 days before the EURUSD peaked)
he commented on intervention prospects with respect to the weak USD

Some strong take always from that meeting were

· Any intervention, were it to occur, would have to be co-ordinated to be successful (Made sense then and makes sense now even on the other side i.e. to stop a stronger USD)
· Some of the factors that would have to be present were
o FX markets becoming less liquid and more volatile.(Think we have that)
o This contributing to excessive volatility in other markets. (We could probably start making a case for this now)

One of the issues then was in intervening to stem the USD decline the level of FX reserves in the U.S. is very low. (About USD 44 billion then...now about USD 39 billion given the $ move now).
That would not be a factor here if the U.S. was accumulating reserves in other G10 currencies (JPY excluded) as strictly speaking they could sell USD in pretty much unlimited quantities

At the same time if Japan were to intervene the same would be true for any USD or Euro purchases they would likely make

In effect intervention is not linear. To stop your currency weakening you would run into problems with regard to FX reserves.(Makes it more difficult for RBA on its own for example)
To stop your currency strengtheningthe issue is paper and ink. Right now they are likely having less and less issues about pushing both USD and JPY into the system at the expense of the other G8 currencies.Indeed theirpurpose would be far more likely to stabilise rather than to reverse these moves.

Bottom line this opens up a dynamic where intervention in EURUSD or EURJPY could be more likely now than at any time recently , and by definition , far easily entered into by the U.S. and Japan than a scenario where reserves could be depleted

At the end of the day we have no better idea than anybody whether intervention will take place. However we would argue that the odds of such an event have moved appreciably higher given recent market events.