Dollar in Doldrums?

DXM9 (US Dollar Index) on ICE/NYBOT

SELL up to 85.75 STOP 86.75 TGT 79.54 - 71.43 (extreme)

Recently I wrote about unusual movement in British Pound where I discussed that British Pound looks heading upwards against USD. Subsequent analysis of USD chart points that USD looks to be heading down against other major currencies (hence the weakness in USD Index). Now this creates interesting situation if USD does appear to be weakening. Back in Sep 2008 I wrote a piece about tendency of world market participants to run to dollar in case of extreme panic or euphoria (the so called dollar smile). Dollar is generally weak in other scenarios where investors look for better returns in riskier areas be it Russian real estate OR Australian copper mines. For most of the bear market of 2008-09 USD has been strong, even if US national debt has been clocking higher every second. And even though there have been some noises in the echelons of power about hegemony of US govt to be in position to control the value of world reserves given that USD is still recognised as world reserve currency. When China sells to Argentina, they do not exchange Peso to Yuan. It goes from Peso to Dollar which Chinese govt reluctantly uses to buy US treasuries to keep as its foreign exchange reserve. However in the new world era, it appears that longer term direction is set to remove USD as world reserve currency. It will not happen overnight, it will definitely not happen in a year but baby steps will be taken to make it happen in my lifetime unless I start playing roulette in Russian casinos. So a very long term direction for USD is down.

 

The confusing scenario or fly in the ointment for USD weakness is the question about recovery in world markets/economies. Even though most markets have rallied strongly since March lows, the economy still appears to be in danger of slowdown. Credit markets and corporate bonds are still pricing in dooms day scenario and even though some bond markets have improved to price in a recession instead of depression, the threat of depression has not gone away and my analysis of bond markets does indicated a lot of pent up energy which can provide a wild swing up in long term bond prices (i.e. a Japan kind of recovery instead of V or U shape everyone tends to talk about).

 

As always, the fundamental reasons will start appearing soon once the charts have started showing direction. This move appears to be in making so if it panes out as planned, this can be a long term ride. One to watch!

British Pound has something going on!

BP/6BM9 Globex or GBPUSD

Buy up to 1.4450 Stop 1.4100 Target 1.5850 - 1.7320

British Pound was turning out to be the worst currency (and worst economy) in the developed world. The deficits are comparable to Hungary which had to go out cap in hand to IMF and there were intense speculations as if the same fate would be met by British economy as well in not so distant future. So I was bit surprised to see that BP chart has started showing quite a lot of strentgh lately. OK, some part of that run up is due to general Dollar weakness but BP has performed strongly against EUR and YEN as well and also other currencies. Could it be return of carry trade? Dont think so. GBP barely offers any decent interest rates compared to YEN and unlike AUD/ZAR - we do not produce much commodities so it could not be inflation and run up in basic metals story. So what is GBP charts saying which is not yet out in news? Short covering - may be and in which case the rally will die after some chop around without significant breakout from current levels. 

One reason could be that may be just may be Bank of England will start putting breaks on the quantitative easing and interst rate cuts (not much to cut anyway). Inflation in UK has remained stubbornly high and any sign that BOE is getting concerned about the inflation may squeeze GBP shorts for some time. Also signs of recovery in world economy would depress dollar and unlike EUR, GBP does not have to bother about Eastern Europe problems. So whatever are the reasons, it would come out soon. As of now the chart looks bullish and worth a punt on GBP long for sometime.

Remember 1989

GOLD (GC) S&P500 (ES)

Still making up my mind about what to do!

Do you still remember 1989 - I was in school around this time in 1989, in class XII. Studying hard (?) for the CBSE exams and various engineering and medical entrance exams which all aspiring students in India ritually take. It was long time before I first got aware of the financial markets and not so long time before I got a taste of my first beer. Life was simple and carefree. There was no mortgage to pay (not even for my parents) and TV's have just stared to appear in my home town. Michael Jackson was still coming out with great numbers  around then. So what is common with 1989 and 2009. Well 1 ounce of gold buys same amount of S&P (a measure of US stocks) as it did in 1989. We certainly have not made much progress financially as the crow flies (without considering dividend of couse which make a significant proportion of the returns from stock market). In the attached chart left scale shows GOLD and S&P500 levels in USD and right hand scale plots the ratio of S&P to GOLD (i.e. how much S&P you could buy for 1 ounce of GOLD). The chart is in log scale to emphasise the relative change. At the time of writing, the ratio is hitting close to where it was in 1989 (0.78 region). 

Now it can mean the following three conclusions:

a) Stocks are very cheap relative to GOLD (i.e. at the level they were nearly 20 years ago) and time to buy stocks.

b) Stock have dropped like stone and there is no faith left in these psuedo measure of wealth and time to pile into "real" assests like GOLD.

c) At least one of S&P or GOLD is overvalued relative to the other and therefore an inflexion point can be in offing.

If you subscribe to option a) time to buy S&P futures and selling equivalent GOLD futures.

If you believe in option b) time to do the opposite i.e. sell S&P futures and buy equivalent GOLD futures (or even physical GOLD if you have lost faith the in whole fianncial world).

If you believe in option c) a market neutral trade can be put on by buying (or selling) equal amount of S&P and GOLD futures. Question would be which direction the ratio is heading.  If the ratio is turning and heading up, S&P would rise faster (or fall slower) than GOLD.  However if ratio is still heading down to regions before 1989, S&P will rise slower (or fall faster) than GOLD.

Certainly times are interesting and that is an understatement. I am tempted for Long S&P and Long Gold position to start with, turning into Short GOLD (if GOLD appears to be topping) or Short S&P (if S&P appears to be tanking further). Let us see what that brings.

For information, 1 S&P emini future is equivalent to 0.3773 GOLD futures so roughly 5 S&P for 2 GOLD.

Gold is getting interesting

GOLD GCJ9/ZGJ9

Buy 828/815/791 and break above 850 Stop below 760 Target 1020

I have been bearish on Gold for most of 2008 and had managed good trades on that. See all that shines is not gold (and associated trade updates chain). However chart pattern is developing in an interesting way. Since bottoming out in Oct 2008 Gold has been on an uptrend. However since March 2008 Gold has not been able to hold above 200d ema. This is forming a nice apex with a potential to break on the upside if Gold can find strength to close above 850 for some time. Bulls are not letting Gold fall too much and bears are not letting it rise. And all that is creating a trapped energy and one side had to give way soon.

The fundamental struggle is about deflation and inflation. If the govt efforts to fight the financial crisis is successful, inflation should be on the cards. This is also evident from most commodities (softs/grains/metals) except energy and oil sector which have silently started turning upwards. Govts would even welcome mild inflation. Afterall they are all borrowing heavily and the only cure for heavy debt is inflation. I am sure the focus would soon return on fighthing inflation but it is like trying to turn a tanker. You can easily oversteer unless the helm is in the hands of an able captain.

Another key issues would dominate would be the strength of USD. If american economy starts recovering, bizzarely it could be negative for USD as people will start taking risk again and USD safe haven will start flowing out again. Also with USD on practically zero interest rate, I would not be surprised if USD would be used as another carry trade currency once the trade returns. Basically a lot of people are scared and parked in govt treasuries at practically zero interest rate. On signs of dawn, these people will start venturing out.

So a bet on Gold upside is bet on sucess of Govts to save the economy and Gold's safe haven status limits the downside anyway.

Safe trade is to wait for break above 850 or 895 and then start entering longs. Adventerous traders can start buying on dips but it would require a closer position management as the trend is still not defined. Break below 791 would signal that uptrend is losing ground and longs should start looking for exit.

I have done one trade of buy at 817 few days back and sell at 835 today. I am looking to keep dipping my toes on the long side in Gold in near future.

Silver/Copper and Grains are looking interesting as well on long side. Cotton is also setting up for long side beautifully. More on that later.

TRADE UPDATE: COFFEE ROBUSTA 2008-09-23

My Development as a Commodities Trader: TRADE UPDATE: COFFEE ROBUSTA 2008-09-23

I closed half my short at 1717 today (+263 points). The Jan Contract is will be on notice day from 2nd Jan 2009 (i.e. shorts can issue delivery notice). In addition Liffe has discontinued 5 tonnes (D) contract and replaced by a 10 tonnes contract (RC) so DF9 is the last contract to trade in this series. March contract (RCH9) is trading at 1550 today while DF9 has been very volatile lately as the shorts are squeezed and then longs are squeezed before every one tries to close their positions. However I feel that shorts are in control. The last trading day would be 30th Jan 2009 and I would aim to come of this position fully by then. As of now I am not planning to roll over this position to March.

UPDATE: When going gets tough .... the Dollar gets going

My Development as a Commodities Trader: When going gets tough .... the Dollar gets going

Looks like Dollar bull days are getting numbered now. I have gradually come out of all dollar long positions and now actively looking for oppportunities to short dollar. One place I like to be in would be JPY. Another interesting place is AUD and CAD. Fed recent action are very inflationary and therefore it is a blessing for commodities and commodities driven currencies like AUD and CAD. Another interesting place to be in is EUR mainly because EUR "might" attract some diversifaction funds in search for a stronger currency bloc. 

I will update in coming days if short dollar trades emerge.

TRADE UPDATE: Is silver setting up to outpace Gold?

My Development as a Commodities Trader: Is silver setting up to outpace Gold?

The trade has moved in right direction since the day I posted it. I have now able to build up a suitable position in short GOLD and long Silver with average ratio of 80.

Fed cutting rates to almost 0% is inflationary in nature and may give a rocket boost to commodities and may even plunge dollar. 

It seems time to become commodity bull is coming again. I am keeping an eye on that.

Is silver setting up to outpace Gold?

SILVER SIH9/ZIH9 GOLD GCJ9/ZGJ9 PAIR

Buy 16 Silver and Sell 10 Gold futures. 

Stop when GOLD/SILVER > 100

We saw spectecular run up in the the prices of Gold and Silver last year with Gold culminating into an all time high and silver in a significant high before both of these "precious" metals started falling like a stone so far this year.

Silver in particular has fallen by nearly 60% from its high whereas Gold has managed about 34%. This is quite expected as Silver tends to be more volatile of the pair and tends to shoot excessively in both directions (up or down).

Now I made an interesting observation that the last bull market in Silver started in March 1993, nearly 6 years before Aug 1999 when Gold bottomed out. So even though I am oscillating between Bear or Uncertain camp for Gold it "could" be that Silver has seen its correction and may be it is turning its head upwards. 

In addition the Gold/Silver ratio is hovering at 80 after hitting nearly 92.5 in October 2008. Such high readings were noted in 1993 when silver started turning up as I pointed out earlier. The reasonable level for this ratio is 50 and the historical mean level for this ratio is actually 16. This points that silver now is extrement cheap compared to Gold. 

An adventerous trade is actually to buy Silver with stop below 8.40 however in the current climate of volatility it could be safer to trade this as a pair and then cover Gold Short when inflation start raising its head again.

TRADE UPDATE: All that shines is not Gold

My Development as a Commodities Trader: TRADE UPDATE: All that shines is not Gold

I am out of this trade again at 760 (+24 points) though I was hoping to ride is much longer. The range action is frustrating me in most markets and I thank all my guardian angles whenever I can come out profitably on any trade in these markets. I am by nature a trend following trader and therefore the range kills me many times.

The price action on S&P during Friday session rang some alarm bells for me and I was in no mood to leave positions over weekend. In addition Gold did touch my first anticipated breach level (743) but bounced off strongly.

If I see weakness next week I might go in again as I am still not a bull of Gold but for the time being, remaining out of this market seems like a reasonable position to be in.

Rice is Rising

ZRH9 (Rough Rice)
Buy on break above 1426 stop below 1330 target 1559 - 1669

While reviewing grains chart it caught my eye that when all other grains (wheat/soy bean/corn/oats) are making new lows and plunging further, rice seems to be the one which has bounced off smartly and also resisting any down days in other grain complex. Rice has bounced off a long term support and therefore some upside could be possible. I am watching if Rice breaks above 1426 or if 1330 level is not breached before entering the trade.

Since fundamentals come in charts first I will also keep an eye on any fundamentals developing.

Point to note is that rice is bit illiquid on CME and therefore can easily be manipulated so it pays to be on the right side of the manipulators. For the same reason I would look to trade March 09 contract (ZRH9) and not the front month Jan 09 contract (ZRF9).

TRADE UPDATE: All that shines is not Gold

My Development as a Commodities Trader: TRADE UPDATE: All that shines is not Gold

And once again (after the holiday related rally is out of the way) I am back again shorting gold. For a small time I was wondering (when I closed earlier short position - see previous update) that I might have to turn to Gold bull soon. But it seems from chart that the recent rally was nothing but a counter trend push during holiday season (that is why it is a good idea to be out of positions during the mad holiday period).

I have taken April Gold GCJ09 short at 784 area with stops above 853. I am planning to add up to 834 and looking for break of 743/699 and 688 for confirmation of trend. I am targeting 650 as first stop and possibly lower thereafter.

These trades are continuation of main theme in the first update so I am not repeating the arguments. Or simply follow the chain in the trade updates.

TRADE UPDATE: COFFEE ROBUSTA 2008-09-23

My Development as a Commodities Trader: COFFEE ROBUSTA 2008-09-23

DF9 (LIFEE ROBUSTA COFFEE)
Sell 1980 - 2080 STOP 2200 Target 1580 - 1450 - 1050

I am back in this trade today with a short initiated at 1980. I am looking to sell up to 2080 level. Break below 1580 will be first target. I am looking that this down leg could go well up to 1050 level in 2 - 3 months.

Coffee has climbed lately (fortunately since I came out of my earlier short) but now I feel that up move is completed. The futures have just touched 200 EMA and dropped from that point. In addition the general climate for coffee producers is not great. Producers have faced "credit crunch" and therefore rallies could meet with fresh selling.

Remember we are now trading Jan 2009 contract DF9.

UPDATE: Looking for bottom in an abyss

My Development as a Commodities Trader: TRADE UPDATE: Looking for bottom in an abyss

This bottom (800 region) in S&P is now tested for the 5th time and with progressive lower lows. This makes it very weak and now I am not sure if it will hold in a meaningful way. Which means I need to analyse this and other markets in light of current situation. My option positions are with limited loss so I am leaving them on but most likely they will expire with loss and I am on sideline waiting for a clear direction. Tempting as it might sound, I am not keen on shorting this market as of now. And the weak bottom is not encouraging me to take long positions.

Technical and fundamentals are coming at loggerhead at current point. US markets have not seen 5 consecutive down months (even in 1920) so technically there can still be a rally but fundamentals are very weak.

Time to attend to the the garden and other matters while markets find a direction.

TRADE UPDATE: Looking for bottom in an abyss

My Development as a Commodities Trader: TRADE UPDATE: Looking for bottom in an abyss

Even though the low point of S&P was breached today (816.75 previous 825) the rebound from the low further strengthens the case that a rally may be in the making. I was glad my position was taken via options so I there was no stop loss trigger (my losses are limited by the virtue of options) and I am happy that the market has changed direction after hitting the lows. Next few days will confirm if this rally has legs and then I can add aggressive positions.

TRADE UPDATE: All that shines is not Gold

My Development as a Commodities Trader: TRADE UPDATE: All that shines is not Gold

I am now (once again) out of this trade at 729 (about 42 points). Failure to breach 681 concerns me today. I am out of this trade now and need to watch if I end up becoming bull for gold in near future.