From Tokyo With Love

Case study for deleveraging and demise of carry trade

While the equities have not achieved much as the crow flies the USDJPY pair has a good story to tell for the power of deleveraging. Now when you think of Japan, you would imagine the spectacular collapse of the Nippon star, decade long deflationary cycle and developed world govt with highest debt to GDP ratio. Not an example of something which will inspire currency confidence and hence appreciation. But look at USDJPY (look at other pairs EURJPY, GBPJPY or NZDJPY as well) and you will find that after hitting a high of 147 in 1998, JPY is been in a constant down trend and broken out of a massive flat bottom apex in a classic fashion. So what is causing the whole world to buy JPY? Not a deep desire to buy Japanese assets but simply the desire to unwind a carry trade position. On back of envelop basis, if you had borrowed 147 YEN in 1998 and sold that to buy 1 USD and invested that USD, you would still be sitting on that 1 USD asset today (+ dividends etc). However that 1 USD would only get you 83 YEN today so you are short by nearly 64 JPY. That’s a big loss you are looking at.
Japanese Central Bank has made threats of interventions but I would think that they learn from the experience of our friends at Swiss National Bank who finally threw out the policy of intervention (and failed to stop the rise of CHF). I would think intervention if any would be short lasting and opportunity to buy YEN at weaker prices. I feel the significant low of 79.70 will be broken though that level is likely to offer some support and can be used a first target. I expect once 79.70 is broken, YEN would reach mid 60s level against USD towards Q1 2011. Against other currencies like EUR and GBP the results can be further spectacular. Yen is in a well defined downward channel and an interesting play on world that is deleveraging.

2010 – The year of Forex?

Will smiling US Dollar dominate most of 2010

UPDATE : 6th Aug 2010 - I was simply adjusting border on the picture and this post has come up on top. This is nearly 7 month old post and please read it accordingly.

USD appears to be smiling again. Dollar smile theory, as per Stephen Jen, predicts gains for the greenback during times when the U.S. economy is either in a deep slump or growing strongly, and underperformance for the dollar during times of moderate growth. Now I am not sure which part of the smile Dollar is moving now but I sense that a trend change is emerging for US Dollar against major pairs and 2010 can be the year the dollar shines again. 2010 could also be the year dominated by foreign exchange markets. The bonds markets are played by central banks and equity markets are not going anywhere.
USD had been a short play for most of 2009 but lately USD appears to have formed a bottom against all major currencies and made impressive first wave highs. Now the question is – is this due to year end covering into USD positions OR a major shift coming. Strangely enough, I do not see much fundamental reason other than massive short position in USD to back this strength in USD. But Oscar has always said that fundamentals always come out in the charts first and as the charts are today, USD is going up.
So how to setup trades for this scenario? I will be looking to buy breakouts from highs for USD (or low for other pair) with stops 3 – 4 Average True Range. I will also look to buy pullbacks in USD (or sell rallies for other pair) at key retracement levels with stops below lows (above high in case of other pair). I will update further on the trades as they develop.

BP set for a fall?

British Pound (6Bu0) not BP (Formerly British Petroleum)

One can clearly see in a long term chart for British Pounds against USD that it is in a prolonged bear market since November 2007 after hitting the headline grabbing 2.116. After bouncing from multi year double bottom at 1.35-1.37 region, GBP did bounce back strongly BUT it was merely a correction in the longer term picture. The correction was completed at 1.7042 level and since then GBP is falling in line with its longer term trend.

At current juncture (1.47-1.50 area), GBP seems to be setting up for another short with a possible target in the 1.36-1.34 region possibly setting up a triple bottom. At current price level, the price is near 50 dMA and also near key half way back resistance levels.

As per current analysis in the attached weekly bar chart, fall to 1.36-1.34 region would complete the down move started from 1.70 region but I do expect that the longer term trend would remain down and after some quick corrective bounces, GBP would start further legs down with possible culmination at 1.25 and in extreme case parity (1.00) level in long term. But at this time these extreme levels are just some mental targets to be refined as the move develops.

Winter of discontent or Santa Claus is here again?

key levels – indices, Grains, OIL, Currencies, Bonds, Metals

WARNING – I could be spectacularly wrong here. Do not follow blindly and jump out on signs of trend reversing. 

It has been an exciting summer for many and as far as markets go, it was quite a choppy session. However a clear pattern is visible in all developed world markets (and much earlier in the Developing World – India/China/Brazil etc) and that of an abundant return of confidence.  Markets have rallied without a significant pullback since March 2009. It is bit tough to find a fundamental reason for such strong recovery when the underlying economy is still on crutches but who said markets are rational.

Autumn and Winter 2009 could be a great period for current trend as the Markets are now setting up into a vacuum zone as Oscar calls it.

Starting with a bullish stance in June 2009, I flattened my positions and took a bearish stance for rest of the summer expecting a correction which so far did not materialise to the extent I was expecting. Recent price action leaves me flat on my positions once again looking for next set of trends to build on.

A NOTE OF CAUTION – it could very well be a summer low volume play and the markets could very well reverse drastically on down side and the whole bull market hoopla turns out to be an pouncing opportunity for bears who return after summer vacation. After all the world has not changed much and there are still several reasons to start selling. Caution is required going into early part of September. Also I do not see this as start of a secular bull market, instead I see it as last legs of the current trends. Possibly we will have new chapter/direction later on the in the year.

S&P500 (ESu9/z9)

The case for bulls is quite strong and I feel we are in the final leg of the up move from March before a long term correction/pullback sets in. My key projection level on upside range from 1066 – 1229. A very wide zone I agree but some are key milestone targets where I will be tempted to watch the action (or move stops higher).

Current Position – Small Long (1025 area)

Bias – Build Long position on breakouts and pullbacks. 972 key level to watch on downside with stops below that level.

Nasdaq 100 (NQu9/z9)

Nasdaq has been much stronger compared to S&P500 and if the bull market is continuing, it should likely to benefit more on the upside. But given the same reason, Nasdaq had been butting against the key sell level (1633) for a long time and it should remain above this level for me to comfortable about the longevity of the bull market. So NQ will be my key barometer on this breakout market. My projections are 1633 – 2040 range (again very wide) but I have some intermediate levels to keep an eye on.

Current Position – Small Long (1635 area)

Bias – Build long position on breakouts and pullbacks. 1560 is key level to watch on downside with stop below that level.

Nikkei 225 (Japan)

The benchmark index of Japan has seen the mother of bear market and has seen decades of decline. In some sense Japan has witnessed the effects of a bubble burst and deflation, things which western world is panicking about today and also most central bankers are trying to avoid. There are however signs that finally after decades of savings, Japanese consumers are waking up to spending. Any global turn around should help.

My current projections on Nik225 are 12000-12384-13000. Break below 9600 will negate this analysis. I do not have any trades on.

CORN (ZCz9)

On my EW analysis, the current bear markets in Corns appears to be over and 300 level in Corn should act as good floor to build positions on. Fundamentally, there is abundance of Corn crop but I feel that is already priced in the markets. Inflation fears and rising crude oil should support Corn at these levels and possible shoot it higher. However end of bear market does not always mean start of next bull market and very often Elliot Waves are not accurate in exact levels (they are good for direction though). In terms of my trading plan, I am starting with key level long dated call options (360/470). Failure of a key short level at 344 could help me come into the trade properly.

Current Position – Flat

Bias – Start with longer dated options on key levels. Look for a short setup failure before getting long with stops below 310.

Wheat (ZWz9)

Wheat on the other hand does not confirm that the down move is over, though it is at support level here. Some of my silly (it seems now) see wheat all the way down to 317 level. I am not prepared to back such a bold bet as of now but instead I would look to sell breaks below current lows. Can act as a good hedge against the corn options.

Current Position – Flat

Bias – Small Sell breaks below lows (485) or watch for action along with Corn/Soybean

Soybean (ZSx9)

The most volatile and exciting of the grains complex is also the most fickle. Best used as a leading indicator for other markets or short term trades. So far I do not see any long term trends. 1180 are likely near term targets if the bullishness continues but none worth putting a fat trade on. Best to be traded on day by day basis.

Crude Oil (CLv9/z9)

Like other commodities complex, crude oil has also shown the return to bullish momentum since bottoming out at $35. From the EW perspective, the Crude should be heading to 88 – 95 region. The pattern with negate on the breach of $58 level on the downside. However given that crude is now trading at 74, the risk rewards are 1:1 on such trades and not worth putting a big position. Need to wait for next big wave. I will continue to trade on day by day basis if opportunities arise keeping the broader direction in mind. The whole energy complex except Natural Gas (NG) is setting up for this bullish formation and worth keeping an eye.

Dollar Index (DXu9/z9)

US Dollar appears to be heading for completing its last wave of down move which can take it all the way down to 72 – 75 region. Considering we are around 78-79, there is not much risk:reward in left in long term trade so worth playing on the downside on short term basis. If DX moves up to 82 I will need to think of a different scenario but until then I am not a dollar bull. Mostly on sidelines watching the fun. 

Along with Dollar, I feel GBP is another currency to sell in coming days and month. It seems to have topped and has a long way to go down.

T-Bonds (ZBu9/z9)

Bonds are one market which is sticking out like a sore thumb. If the world trouble are getting over, the interest rates should start heading up, especially the long term interest rates. And for a long time, I am of the view (which had been quite profitable) that the long term bull market in govt bonds is OVER. But current setup points that most bonds (T-Bonds, German Bunds and even UK Gilts) are looking up. The central banks are keeping the market distorted. Banks are also buying bonds instead of putting the money in economy to repair the damaged balance sheets and keep cushion. Or they are simply setting up for a juicy short somewhere up there. In all cases, I am on sideline watching them wearily. Hopefully some clue will emerge soon.

Gold (GCz9)/Silver (SIz9)

Gold and Silver markets have been consolidating in a range for better part of this year. Best is to play them on range breakout basis. For Gold, I am watching 966/900 level. Breakout above could lead it to 1220/1350 level. Breakout below could target 840-740 area.

Silver is in similar predicament and similar levels to watch for breakout are 15.40/12.40

Cocoa (Cz9 on liffe)

Cocoa is setting up for upside breakout once again. Buying dips and breakouts with stops below 1700 is the plan currently.

TRADE UPDATE : British Pound has something going on!

My Development as a Commodities Trader: British Pound has something going on!

Now that my first target of 1.5850 was hit, I have taken opportunity to reduce 50% of my position around 1.5850 - 1.5900 area. The hard stop on the rest of the position is now below 1.4940 area which is well above breakeven.

As of now I am marking next set of profit taking area as 1.6800 on my charts if we ever reach there.

In my heart, I do not see GBP as a very strong currency in the current environment and I have still not figured any fundamental reason for GBP strength other than general USD weakness, hence I am reluctant to back this long trade by too much risk. However I have learnt to trade what I see and now what I think. The chart is still bullish. If there is any reversal, I am watchign the 1.4996 -1.4940 point carefully. If we start to bounce from these areas or even earlier, I would consider adding more to this long as it might have some life left.

As of now, it is enjoy the free ride moment for whatever position I have left on.

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.

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.

When going gets tough .... the Dollar gets going

What happens when you have a crisis in the middle of presidential election quarter - too many cooks spoil the broth! This is what seems to be happening in US today. Everyone has some axe to grind and some points to score and when you have politicians meddling in free markets you can only expect a very spoiled broth finally.

It was really cheeky of McCain to parachute himself into the negotiations just when all the "hard work" is about to be completed. It was a nice ploy to distract attention and may be score some points about his "country first" credentials. And at the same time I never understand why current US administration has to rule its subjects in such a climate of fear and bullying. Every major holiday period results into "red or orange" alert on all airports, promptly broadcast via all available loudspeakers and flat screen panels. And these days it appears all Bush speeches look similar. "Congress needs to pass this in shortest possible time or else we are doomed" seems to be the theme. First it was weapons of mass destructions and congress needs to commit US to war, then it was "stimulus" package to boost US economy and now it is committing $ 700 bln of tax payers money to bailout some wall street bankers. The only thing common is the siren call of impending doom and a "silly" smirk on the face of Mr. President as if telling the world - "don't think, we don't have time to think, you need to do this or else we are doomed". I am not sure why Americans allow them to be ruled in a manner that any voice of dissent is "unpatriotic" and any one who does not agree with the "Solution" is part of the "Problem".

Anyway, as clear from the rant above that we are in a very uncertain time. The problem facing the world markets is grave. After all merrier the party, messier the hangover (and of course the clean up afterwards under the influence of hangover with every T D and H shouting in your ear - I told you so).

I feel the bailout package will be passed in one form or the other. Most likely with "phased money instead of 700 bln upfront", "with lots of political/bi partisan/congress oversight of the process" and with some other "political agenda thrown in". Whether it will solve the problem or not will be a different question. My view is that it won't. It will avoid the melt down but it will not provide the boost. It can slow down the rate of decline but it will not start the growth. That will take its own time until the poison bleeds out of the system.

There is abundant talk that the bailout will crush the dollar however I do not feel it that way. Of course if the bail out helps start the "growth" once again in the world economy then possibly dollar will be under tremendous pressure. However given the scale of the problem, I do not see suddenly US consumers into buying frenzy once again, flocking to the Las Vegas condos with giant flat screen TVs from Korea and all those "Made in China" stuff. The decoupling theory that developing world can grow without depending upon the developed world is flawed and has been proven wrong already.

That leaves with the question - if Dollar is going down, what will go up?

- Would I rather hold Turkish Lira in these times or US Dollar. So that leaves emerging markets out.
- Commodities are already in bubble and that is bursting soon. We are not likely to see money returning to these sectors soon.
- Oil is under pressure and would remain so as long as world growth is under threat. Only upon turn around in growth would oil start making new highs once again.

So as long as there is no alternative to US Dollar as reserve currency, we will end up with stronger dollar while this mess is being cleaned up.

However I could feel only two assets which "might" be able to beat dollar. One is JPY - the huge unwinding of carry trades and rising inflation in Japan and alignment of growth between Japan and US might favour JPY. Second is GOLD - but only if the fear reins to high. These could provide interesting trade ideas for future.