OK I’m A Dollar Bull Now…

Just seeing one chart has changed my bias on the dollar totally by allowing a confirmation of a few fundamental concepts.

I have to really thank CNBC’s Todd Gordon for this one.

I read his article and noticed that he is using a different USD gauge.

I generally look at the dollar index as a function of equal weights.

However, just by looking at a more-applicable-to-reality trade weighted dollar, it has generated new thoughts and perspective on my macroeconomic view, as well as currency risk view.

Take a look at the TW dollar…

We have indeed breached a 30 year trendline and have found some support here at just below 85.00.

I’m not saying that we are going to rally off from here into 110, since I think we are still due a dip down to 75, but my very long term view is now bullish.

This is supported by various different other background events.

Let’s look at the 10 year yield.

This is following the same path as the trade weighted dollar (naturally).

With the Fed unwinding, I think that a situation such as in 1994 will occur again.

Bonds sold off in 1994 and yields rallied by 46%.

If yields move to where I think they will, that would be a 75% move from current price.

Why are yields moving up? The Fed is shedding assets from their balance sheet after having undergone the fantastically functional QE programme of the last 9 years (sarcasm).

See below. I have added 3M USD LIBOR onto here as well.

fredgraph (1)

You can see that when the Fed underwent their QE programme, USD 3M LIBOR fell a huge amount. This meant that USD was very liquid and interbank borrowing costs were low. Basically, everything was nice and liquid.

Since the Fed has started hiking in late 2016, 3M USD LIBOR started pushing up. Markets knew that this was in preparation for the Fed to start their great unwind. You can see this in the gradual decay in assets owned by the Fed (blue line) since 2016, with a slight acceleration in late 2017 when they announced fully that they will be shedding their ‘assets’.

But what does this mean for the dollar?

Well, a rising LIBOR should indicate dollar demand/supply constriction.

Take a look at this chart.

3M USD LIBOR is lagging spot USD by a large amount.

If we go back to our yield and dollar index charts, we can see that a broad upside move is not that crazy an idea if it holds that we are going to face a dollar funding problem. This dollar funding issue also leads to another problem and that is to do with liquidity.

We’ve already seen some flutters in the TEDRate, an indicator of liquidity risk.

When the Fed announced their unwinding, we saw a gradual rise in the Ted Rate which led to the highest level since 2009. Essentially, this priced in that liquidity risk was higher than the European debt crisis in 2012.

This indicator shows the credit worthiness of our biggest banks – LIBOR is the price that they lend to each other on the interbank market. A spike in the TEDRate means there is more ‘risk’ on the interbank loans market. That is not good.

The Bank Index has probably reflected this occurrence.

The drop off in price from the run up to the 2008 high could have some meaning in this case, especially since before the 2008 crisis we faced USD funding cost issues as well.

USD 3M LIBOR moved up pretty rapidly pre crisis then… it’s exhibiting the same characteristics now.

fredgraph (2)

Essentially, I feel the dollar is currently heavily under priced if we follow the underlying money market fundamentals. I think that there is some downside left and the current move is a short squeeze, but there will be a more broad based dollar upside move in the next year to 18 months, and much of it will be driven by dollar funding issues.

 

 

 

 

 

 

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Why do brokers provide technical analysis?

 

hf

Honestly, have you ever looked at a piece of technical analysis that a broker has emailed to you?

Emails starting with ‘Technical Levels for 16/03/2018’.

Why do you send these things, but then promote in education that you should follow your own strategy and do your own research?

Oh, and why do brokers expect clients to follow their analysis when they’re probably trading against them?

It’s bizarre, but probably due to a little thing called SEO, something which I’m learning about in this blog.

In my view, market analysts are little more than content marketers.

And that’s absolutely OK.

Even at banks, analysts producing reports are just one cog in the commissions machine – investors want to feel secure in the notion that the people handling their cash know what they’re doing (although, if they just bought $SPY and held for 10 years, they’d probably earn more).

I guess that if a retail client from a brokerage receives something that looks good, there’s a subconscious feeling of security, even though total autonomy with execution is with them…

The broker is just there to collect fees.

At the end of the day, most revenue is derived from fees (example is from advising on M&A but you get the picture).

That ‘2 and 20’ structure, where a hedge fund takes 2% of AUM and 20% of any profit earned has worked well for many years.

The 2% has been explained to me as a manager’s bread and butter, while the 20% is just a bonus – I mean, it’s probably why Bill Ackerman isn’t crying his eyes out after losing out on Valeant and Herbalife.

Some investors have been questioning this model for a while now…

And Mr. Buffet’s famous bet would add fuel to their argument…

Back to the brokers…

It’s not a criticism of why they do it, but I just wonder whether it’s actually worth it in the end when they’re likely to collect the fee or profit off the B Book anyway, since the stats even out to 80:20 loss:win with any types of marketing strategies anyway.

 

 

 

$AUDJPY: Can an FX pair signify recession?

I wrote this last June:

Source

AUDJPY: Are We Heading For An Extended Period Of Risk Off Behavior?

Jun. 15, 2017 3:45 PM

Summary

• AUDJPY, if it hits the target I have outlined, signifies that we would likely be in recession.

• Japanese yields steepening putting downside pressure on the pair in the long run.

• China slowing down affects the Aussie hugely.

I use AUDJPY heavily to assess risk sentiment, since AUD is very sensitive to economic conditions surrounding production (more demand for iron ore, copper, etc., means higher GDP, construction indicators, overall happiness) while yen is bid during periods of uncertainty. I have been watching and waiting to see what price does around the ¥80-86 mark.

For me, the future looks quite bleak for the pair.

Take a look at the monthly chart below.

As I said in previous articles, I only consider head and shoulders patterns significant on the weekly and monthly – and looking at the technical context of the pair, this head and shoulders is hugely significant as it provides a target to past the price we have seen during recessionary periods.

Firstly, note the top blue rectangle. Price has tested and retested the financial crisis high and has fallen off pretty harshly. This supply has been consumed, and for me, this indicates that the upside of the overall structure is exhausted. From my experience, the probability of the support structure breaking and heading lower is very high.

Secondly, let’s consider this support structure (middle blue zone) at approximately ¥75.

We’ll look at this on the below candlestick chart.

The blue zone has been touched 5 times now with no price breakthrough.

The 2010 low of the range ¥71.91) is still very much intact. What is vital to understand here is that longer term traders are likely to still have stops under this support level.

The market is going to want to target these if we start to probe around ¥72-75. If the conditions would allow, then we could see a slip to ¥68-¥69 and an upside retest of that ¥70 level.

Now, speaking of conditions, Japan’s monetary policy has been relatively unwavering – there has been stability from the BoJ and in terms of being a risk off currency, this is hugely attractive to traders looking for safety or a long term position trade (the only problem with shorting this is that carry will be paid when holding a position overnight).

One aspect that you can add to being bearish AUDJPY is that the Japanese 10YY is pushing to above 0% again.

Chart from Bloomberg

The BoJ are also looking to steepen the long end of the yield curve in order to satisfy Japanese financial institutions.

It is also mentioned that the Japanese may pursue ‘stealth tapering’ so as not to affect the financial markets akin to the US in 2013.

This can provide certain confidence to traders being long yen vs. commodity backed currencies such as the Aussie.

Consider also the Chinese situation.

Below is Chinese GDP.

Chart from Trading Economics

Remember previously I said that the Aussie is heavily affected by productive demand? China is a huge importer of Aussie copper, gold and iron ore.

China is Australia’s best customer with $45bn being exported there annually. China is currently experiencing a slowdown and I do not believe the full effects are yet apparent, not just in the Aussie, but globally (Chinese credit bubble in the shadow banking sector has been named one of the biggest tail risks to the financial system).

If the Chinese slowdown proliferates, then I’d expect certain effects on the Aussie long term.

Note the first chart again. I think it’s important to note what occurs to AUDJPY during downturns.

I have noted 1 (early 90s recession), 2 (Asian crisis – yen bid in risk off environment) and 3 (financial crisis of 2008 – again, yen bid in risk off climate).

The head and shoulders target measure of taking the length of the neckline to head, and mirroring that from the neckline to the downside identifies that ¥50 is a potential target if the support at ¥70 breaks.

I’d be almost certain to argue that we would be in a recession if this were to occur if we examine history, and history, in the end, does repeat itself especially in the financial markets.

Image result for its happening gif

In FX, simplicity is best… #fx #btc #audjpy

K I S S

Keep It Simple Stupid

Probably what you hear about everything.

In trading, it’s genuinely hard to keep things simple.

First, you pick up bad habits.

Next, you try to create a fantastically amazingly filtered strategy with loads of different variables, because you’ve been told you should be able to measure your hypothesis, and science normally says to filter until you get a valid conclusion, right?

After that, you become frustrated and feel pain.

Emotions get the better of you and you lose your head.

You lose money…

Then you repeat the process when you’ve calmed down.

It’s a vicious circle.

The issue with many comes down to the lack of understanding of price and the interpretation of it, which transfers into the understanding of risk.

Slight tangent re: risk. I saw a tweet describing spotting valid risk parameters as being an executable entry with ‘positively asymmetric’ risk:reward.

I’d never heard it be described with that phrase but I like it.

Technical analysis only works when you can interpret price.

The best FX traders are able to understand that TA and FA alone are limiting in their nature.

There’s a reason why interbank dealers make money – they can see the market… and well, they are the market.

We have to interpret price as we see it on our trading platforms to have a best guess as to what these guys are doing (well that’s what I do anyway).

One way recently that I have further simplified my trading is to just look at Heikin Ashi candles (and I mentioned this in my ‘What I have learnt after 7 years of trading‘ article the other day).

This has made my life easy.

Previously, I’d have to determine where the valid zone is that I’d expect a bounce from and then place up to 10 orders across the whole zone.

Heikin Ashi has changed that… and I can’t believe that it’s taken 7 years to find this out.

This is how simple it’s made my strategy…

I ask myself, ‘where was the last supply before it broke the low? Where is the untested demand that broke a prior high?’

Then I place my orders.

Below is AUDJPY and I mentioned I was selling it here.

That’s how simple it is, or at least how simple I personally find it.

There are other nuances as to whether I want to take it or not (I’m not going to say them all), but that’s the barebones – and Heikin Ashi has made where I want to do business so obvious it’s scary.

Arguably, it’s irrelevant as to what your filter is, but I’d say find something that makes it as obvious as possible. I have found it after seven years… seven years of thinking a chart display was a broker’s trick…

As I said, you learn something new everyday, so thanks @ForexCobain

I am adding to my short AUDJPY position

I’ve been short AUDJPY for a fair while now since 86.80.

This was based on deteriorating Chinese conditions, which affect demand for Aussie commodities such as iron and copper, and the evident risk off situation we faced through January and February, and arguably are still facing.

For this trade I’m just looking at taking some cash and covering the rest of my position that I have running – this is pretty high probability in my view, so I’m confident about changing my stop loss criteria and upping risk to 3%.

Let’s see how this plays out.