FOREX GAUGING RISK I received a question asking: How do I know that consensus is waning ? BTW you can PM me if you have questions Forex heading the wrong way. Analyst trying to find justification to their previous views. Swing formations on daily (channel, range..). etc.. More important is the risk sentiment, because a destabilized, waning or no consensus usually happens during risk off sentiment. If you follow the market flow constantly you don't need anything to know that sentiment is shifting. If you need indicators the first, the best and free one is the YEN. The only real safe haven with the US 10 years. If you see the Yen climbing against everything with no fundamental reason,then risk is Off. But the risk is not always fully off. 3 years ago it was quite clear, we had the risk on currencies and the risk off ones. The USD was risk off but not as risk off as the Yen. The Euro was risk on but not as risk on as the Aud. Today we don't know which is riskier than the other, but the Yen is till the ultimate safe haven. This is important because we don't have any other refuge than the Yen we can see it climbing for no serious reasons. Like today, because of the persistent Oil sell off imapcting the stock market. It won't take too long for the stock market to figure out that a falling Oil is good for stocks. The sell off here is mainly due to people hating to see something falling so quickly mainly OIL. Why the USD is sold. Forex is different and we have 2 things. Real money out of the market letting the price being driven by EOD techs and also by some big players thinking that the Fed will not hike in December because of the new deflationary risk generated by the falling Oil prices. Actually we don't care about all that, we just let the market pricing in its new uncertainty then we will buy the USD from the lows. And probably versus the Yen.
GBPUSD: Sold this morning -100k before the BOE data during liquidity search, as usual, crazy cable returned North. We have Governor Carney speaking soon, don't thing this gonna stay that high.
FOREX Didn't find time to post during the commodities sell off (too busy ). During high nervousness on SPX, Forex drivers are messy and don't follow usual dynamics. We should keep in mind that Forex is also used for hedging commercial sales. Purchasing and sales managers turn to Forex to hedge their foreign contracts during global market stress and their impact can be significant when market is thin (real money sitting on the sidelines). GBP TRADE GBPUSD: We added -50K at 1.5128, we are now "short" -150k. Lock all at 1.5120 Why are we selling GU and not EU: Both currencies are limited on the Upside because market is waiting for the FED liftoff. But we avoid the Euro because its too stretched on the downside and is prone to generating squeezes. These squeezes can be ignited by the growing idea that the FED tightening is going to be more limited in scope and pace because the commodities massive slump is going to modify FED projections in terms of inflation (monetary policy first leg being price stability). This view is sound but it's not only the Fed who would reassess its views but all the central banks (zero sum game). More important is the divergence in the Economy and the US are doing rather well in terms of Growth/Employment (monetary policy second leg). If we want to dig deeper, we could also add that inflation must be dealt with way in advance (tightening), while commodities impact on price is immediate. Therefore either the commodities slump is going to last and on a longer term it's good for the Economy (growth generator), or it's going to stabilize and its impact on price stability gonna be short lived. To make it short, the US are not the Eurozone and the FED is more concerned about inflation than deflation, whereas EZ has deflation fears. We, as traders, we are interested in how market prices in all this, we don't seek to be wrong or right. We know that: Market is thin, because this is the End of Year and real money locking their portfolios are sit on the sidelines. Also many lost money when ECB under-delivered on DEc 3rd and they are not ready to be exposed again mainly on the Euro. FED tightening is questioned by some participants (see above) this can limit the Euro on the downside and the USD on the upside. Forex currently is Commercials and EoD techs driven, this can be either directionless or dangerous (daily gaps). Commodity currencies (AUD, CAD, NZD) are falling, hence amplifying distortions in inflows/outflows usual correlations. Market has not yet fully priced in the BOE projections. From all this we don't have a clear direction because both sides are limited mainly on the EurUsd. That's why we prefer the GU we see reaching 1.4850. For that we use the FOMC next meeting catalyst which will slam the bullish Techs. Nevertheless as we said many times Cable is prone to nonsense, we should be cautious and also keep in mind EurGbp correlation can impact GU direction. We lock all above 1.5120. Why locking so high? Because we have already made tons of pips on GU, and in the current instability we want to give its chances to this position. We accepted more than 100 pips drawdown because the upside was limited and the Tech ping pong will lose stem when we approach the FOMC meeting. Techs impact is always limited in range, but one must know that the current dynamic is Tech driven. By locking we will make few pips and let more than 150pips to the market if it reverses due to the thin liquidity, but if the FOMC is above expectations in term of tightening (actually it's what we think) we could probably reach 1.4600.
GBP TRADE GbpUsd: Our Target was reached (1.4850 white area). Still holding -150K and locked at 1.5125. Cautiously we are going to add during liquidity searches prior to upcoming catalysts. We look at 1.4600 area and we have big KO barriers at every rounded numbers (x.xx50, x.xx00, x.x000), the rounder the number the bigger the barrier). You have more explanations on Exotic options barriers here : Forex Stop Hunt you said . We see significant resistances until the next target area and seeing how the Cable is prone to generating gaps we keep the lock at 1.2125. To add substantially we need serious confirmations either from the BOE itself or from weaker than expected indicators on CPI and GDP/Employment. Technically use the left on the daily/weekly chart to pin point strong cluster resistances. Monitor EurGbp closely for inflows/outflows movements.
EurUsd: Holding -100K short Decided to sell EU after the FOMC decision yesterday ( twitted it before doing it as usual @neoflytox) because all uncertainties are now behind us. We are going to be cautious here. We will add: During liquidity searches prior/after big catalysts During barrier attacks. This time our positioning will be way more lighter, tactical and precise because we don't have any global consensus anymore. Furthermore big players who got hit after the ECB lukewarm decision will stay nervous and cover at the first uncertainty not to mention the End Of Year portfolios statements.
What do you think of USDJPY? I would have thought it would go up, but after BOJ and FED both made announcement, USDJPY is down...strange. One would think US dollar will get stronger with higher rate and improving economy and Japan keeping its QE in place.
The Yen here is driven by risk aversion as the ultimate safe heaven. Flight to safety is seen on the VIX (SPX participants hedging stocks portfolios) and the 10Y treasuries and is generated these days by commodities sell off.
GBP TRADE GbpUsd: We added -200K and still looking at 1.4600 area. Holding now -350K Proceed with caution and keep an eye on EurGbp. As said before we see significant resistances until the next target area and seeing how the Cable is prone to generating gaps we pull the lock above 1.4860. To add substantially we need serious confirmations either from the BOE itself or from weaker than expected indicators on CPI and GDP/Employment. Technically use the left on the daily/weekly chart to pin point strong cluster resistances. Monitor EurGbp closely for inflows/outflows movements.