Thursday, March 7, 2013

FX

I'm not sure if I'm going to try to cover the FX markets, what happened today, why it likely happened and what it means.

As you know the BOJ announced their policy statement last night, the outgoing governors, despite pressure by the Prime Minister, rejected immediate, ope ended asset purchases. The new incoming BOJ governors are expected to be a sort of extreme departure from the current/outgoing ones and they are in lockstep with PM Abe.

In fact Dallas F_E_D president, Fisher actually voiced concern that Abe is "Politicizing" the Bank of Japan and adding to his comments on Abe, "He is aggressive".  I think it's pretty telling when a regional F_E_D president comment on or rather criticizes another central bank and he's far from the only one.

At least one current member who will be staying on board made her loyalties clear, she'll stand with Abe's choice of new leadership, but she is only 1 of the 9 member policy board. The conventional wisdom seems to be the other members may not be so keen on abandoning the current path for a much more extreme policy stance, obviously led by the PM.

I don't know what will happen longer term, but the Yen figures prominently as a Carry trade pair which is important as many hedge funds and Institutional investors not only take advantage of the carry trade, but use it to finance their equity operations, small moves in the FX market at the leverage some of these professionals are using can lead to catastrophic results so I think it's fair to say there's some uncertainty as to what the BOJ will actually do, there's little doubt of what the new crop of leaders want, but can they get it?

In any case, we have more FX traders than I was aware of. Yo may recall yesterday I felt very strongly that there is at least a temporary floor in for the EUR/USD at $1.30 and yesterday that was broken to the downside, which essentially means I'd take the pair long, well one of our member's wrote to me this afternoon,

"Hey Brandt,
 
What you're posting is helping. Taking advantage of the euro trade from yesterday allows me to take those profits and flip it into today's position. And when dealing with leverage, the security of 'free money' is a big bonus.
 
Just wanted to give some positive feedback before I forget."

After asking a bit more about what he's doing and his permission to repost the exchange, he offered up some more thoughts (I've always liked the FX market, I feel it trends better than commodities or equities, but as he admits and as I commonly say, "There's a right tool for every job")...

" In fact, it works great when an option trade isn't appropriate. Different tools for different scenarios. I went long aud/jpy yesterday when you brought up those positive 1 min charts. I got a few more pips on that one than I expected(when i woke up this morning). You can definitely enter some short term trades with the tight correlations. 1 SPY weekly call would not have netted as much as the aud/jpy.
 
TOS has those mini pairs in the commission fx pairs(you pay for a tighter spread). So they don't even have to enter full positions if they don't feel comfortable yet."  

While I mostly use FX analysis for broader market analysis, as you can see, one of our members made two profitable trades in less than a day on just very basic information posted. I'm not trying to push anyone toward FX trading if they are not comfortable with it, but as we both agree, the more tools you have at your disposal, the better your chances are of having the right tool for the trade.

In any case, here's my take on FX as of now. It seems to me that the Yen has already discounted Abe's policies and BOJ picks, now it's a matter of whether all of them get through and then whether they can get the votes to push through what most would call a radical agenda. The G-7/20 pretty much stopped short of calling Japan out on the carpet for currency destruction because most of the member countries are doing the same thing, they just don't have the same amount of dilution yet. The fact a sitting F_E_D regional president called the policies extreme shows that no one really wants to go toe to toe with Japan when it comes to a currency war, the problem is, many will be forced to.

In my mind the real wild card is China who has already started draining money out of their system, they know hot money is flowing in to China as a result of the currency wars which will only get worse, China will pay for it so don't be surprised to see China take drastic measures to curb inflation which is now hitting their housing market.

I see the Yen as a trading short for now and maybe something like AUD/JPY short, but only in small trades. I'd expect the Yen to move lower on confirmation of Abe's picks, maybe move higher if all 3 are not confirmed. However I think to a large degree, the Yen has discounted a lot of what Japan wants to do. I wouldn't want to be short the Yen near any kind of policy or decision moments.

The EUR/USD seems like it will head a bit lower from here, to me it's not worth the trade as the $1.30 level seems to have a floor in, any moves below $1.30 and I'd be looking at the data and looking at  long EUr/USD lie our member above pulled off yesterday for a big gain.

Currencies are connected to our markets and assets in many more ways than most would imagine, I think this is a time for some wild volatility in currencies as the devaluation wars heat up which will lead to trade wars and China will not allow inflation as a result of worldwide currency devaluation, what they will do and how far they will go remains to be seen, but I personally can't imagine the limit at which they would back off to keep hot money from entering and inflating their economy.








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