It looks like we did not have to be all that patient after all. Things fell back into line a lot faster than anyone expected. The start of the week will be key in determining whether equity markets will further normalize or whether a complete retracement of Friday's sell off gets us back into everyone's pipe dream. Historical return correlation between AUD and SPX stands at a high 0.8 thus equity markets are to be closely watched on the fx side as well. It will be interesting to see whether European leaders will be called in from their summer resorts for another around of "solve-nothing-emergency mettings" should sovereign yield spreads to the bunds remain unsustainably high. As I pointed out in an earlier post, any concerted effort of a head-on hedge fund assault on European sovereigns and the euro would be very well timed right around now, none of the stability mechanisms are in place and ECB shows its poker hand to everyone by keeping its fixed rate of fixed rate tenders as part of its refinancing operations at a relatively high 0.75% (high given the current environment + vs BOJ and Fed). They pretty much volunteer to tell everyone they expect much worse to come and this is pretty much all they have left in their tool set.
One of the first days in a while where it pays to bet on further market losses. Spain looks to be on fire while most have already written of Greece. Equity markets have a lot more downside potential which causes me to stay very Australian dollar bearish. Aud would need to trade above 1.0350 to open room to the upside. Thats a fill 50 pips from here and highly unlikely right now unless ECB starts up their bond buying engine. The chance is high that ECB does start buying sovereigns today after a long break. If it does not happen then I see it as a strong negative in a sense that ECB estimates the situation to escalate a lot more. So far the top performers on the downside are the yen crosses, closely followed by aud. Key here today will be how Ibex opens in about 40 minutes and where market participants take the Spanish index.
Today is one of those days where someone trading fx better not even leave the seat for a piss break. Lots more downside looming, on the other side ECB and especially BOJ/MOF with usdjpy now trading below 78. Would love to see a dip down to 77.75 to get involved, probably buying upside optionality. Edit: Reset eur stop loss to 1.2122.
Eur looks incredibly sticky, I tighten the stop loss to 1.2110, Ibex traded another 1% down while eur is being well bid. Not as smooth a ride down as I expected so far.... Edit: I have a weird feeling about this, hearing chatter China is on the bid so is some other ACB asking for prices in yen baskets ...hmm...Japan sniffing around?
I got out at 1.2110 for a 10 pip loss. What a depressing day, bet on the last horse which died right after the finish line. Going home with an open aud position and nothing to show for closed positions. I hear some Japanese megabanks are heavily involved bidding up yen crosses, the only explanation I have is they bid up a lot more on the eurjpy side. Missing out on large market moves is equally painful as losing money. Its the same as a momentum based trader: If he does not let the position really run off the back of a large trend he cannot make up for all the small losses and stops. Opportunity cost is an equal bitch as a loss in your face. Enough said. Good news is the market provides new opportunities every single day.
What an odd day, yesterday: * Spanish stocks got killed, Ibex down -5.5% then short selling ban for all Italian and Spanish stocks announced, ibex closing down -0.7%, Dax taking the heat instead. Short selling bans never worked and they will not work this time. It is only a testimony to how little politicians understand about economics and market psychology. * All yen crosses and dollar crosses sold off heavily with one notable exception: EurUsd held up very impressively. * News crossed the tapes that first the IMF will not allocate more funds to Greece, then a retraction of such decision by the IMF, then Greece announcing it quit its IMF and Troika cooperation, partial retraction later. * UsdJpy sold off, dipping quickly below 78.00, rumors had it BoJ and MoF asking for prices in yen baskets but in the end no action taken. For me there is no doubt that medium to long term we will see EurJpy trading at 70 levels. Now this does not help much in my daily trading efforts but politicians, monetary policy setters and regulators, however, should have medium- to long-term views, and I get the impression that especially in Japan an understanding of market psychology by even self-proclaimed financial market experts (BoJ members, finance minister) is virtually non-existent. I have no idea why the finance ministry and BoJ make themselves to a clown by coming out every single day, repeatedly stating that "we are vigilantly watching excessive fx moves and we will act accordingly, no tools are off the table". Lol, and what really gets me is that such comments are coming out after usdjpy moved by some 50 measly pips. I will be on my well-deserved 2 week summer vacation to Seattle, Vancouver, and surrounding Whistler mountains and Vancouver Island this year starting in one month (I want to hunt and kill bears, hunt down killer whales and rip their carcass open, and hope to find dinosaurs in the woods I can wrestle with just to release my frustration with central bankers ;-), and I am not really inclined to try to make a whole lot of sense of the current market moves anymore before taking off. To be honest I have almost never before witnessed more irrational moves, whipsawy price action, and total nonsensical central bank communique than in the past 1-2 months. I said before that the really big moves are all still before us. But prior to that we need to get this stupid QExx out of the way, we need to have all central banks exhaust their policy tools, all Cb discount rates at zero, and then we will see what market panic really can do to asset prices. I somewhat really look forward to that not because I wish others to lose their savings or suffer but because I want markets to move again in a healthy way, and my image of this market is like a pressure cooker, just that we took the pressure valve away and sealed the cooker taking the risk that it may explode any moment. People can rant as much as they want about realists like me who say that we must wash out this filthy system, must free it of bankrupt skeleton banks, must let insolvent countries let go bankrupt..., but sooner or later we must return to real life, a life where survival of the fittest applies and the too weak and sick wither. In a sense China is much more free market focused and capitalist than any western country at this point in time. Enough...back to getting a sense of where London wants to take the euro today. I still keep my aud trade open, in fact I decided to let this position on the lose just in case the market decides to completely disintegrate before or while I will be away. Not much harm done should I get stopped out at entry level. This is exactly the type of trade I look to manage on the discretionary side. My algorithmic trading strategies work well intraday, however, I look to catch larger moves in sync with market sentiment. In the past 2 months I found it very hard to catch larger moves mostly because markets were so range bound in nature. I expect (well partly hope) that the end game for Greece is near and I see no reason why panic won't spread to Spain and Italy. There is no money ECB could print or invest in buying sovereigns that save both Spain and Italy. Something has to give, either Germany and Northern Europe bites the bullet and accepts that an integrated Europe means Northern Europe transferring hundreds of billions of Euros to the South or the Euro will falter and end its existence. I do not see any other way out. But this is again chatter to be had in a few months - 1-2 years...
I enjoy your commentary and sometimes I get ideas from what you write. So, thanks for writing All around nice commentary on the current market environment. However, I disagree with your view on BoJ guardians. Imo, they are acting in a very smart way by coming out verbally whenever u/j makes a 50 pip move intra-day. The huge interventions they did over the last 2-3 yrs is still back in the minds of market participants. The constant fear mongering that they are engaging in has kept market participants on their toes. The 76 line in the sand that they protected last year for months has almost removed the speculative interest from driving yen any higher. In fact, we saw a massive 76 to 84 rally in u/j in the first half of this year after speculative attack on strengthening of yen had subsided from the market. I think they have been very effective in using their policy tools, interventions and constant fear mongering - otherwise u/j would have been below 68 today (if you just look at the rate of u/j descent before they could engineer this mix of policy tools+ fear mongering. Look at u/j 3m historical volatility and compare it to todays levels. Its a clear testimony to the success of Japanese in controlling the u/j level. Agreed, however that none of this could prevent u/j from going from 200+ to below 100 over the last couple of decades and fundamentals did assert themselves over the long term. But then that time frame is not really material to short term traders. Finally, have a great vacation. I have never been to Canada but I hear Vancouver is one of the best cities in the world to live.
I am not sure I can agree with your analysis. You say the currently lower vol environment in u/j, the level above 76, is all due to BoJ and finance ministry intervention, real or verbal. I beg to disagree. If you define intervention success as the ability to move a pair 500 pips then I must agree with you but I would say that this is not what monetary policy should be about. Their mandate is price stability (aka inflation) and the "stability of the financial system" (loosely translated). That means their mandate is not to bother about short term market levels, short term volatility maybe but not absolute levels. Thus, I would argue that they should have a strong interest in price stability in the long run. First of all their mandate is not to support exporters, but hey, which CB holds itself currently accountable to its mandate, nobody. So lets not argue about that part. Fact, however is, that each actual intervention they have undertaken has miserably failed after very short time. One reason was that they did it all on their own instead of performing intervention as a concerted effort. So, I would hardly argue their interventions as being successful. Markets simply proved them wrong. Now, whether verbal intervention works and whether it can account for u/j currently trading above 76 is another issue, entirely and on this I guess I also have to disagree with you. The reason is that u/j is hugely driven by U.S. and Japanese yield differentials. Also a big driver for long term levels is the fact that a huge proportion of Japanese sovereign debt is held by domestic institutions and households rather than foreigners. This makes the yen the perfect safe heaven currency. Despite the descent of Japanese productivity, the loss of corporate powerhouses internationally Japan is still the relatively safest place to park funds, and there is nothing BoJ or MoF can do against. This in my opinion is what drives the exchange rate medium to longer term not verbal intervention. Who believes those clowns anyway? The last time they have done something that worked out was like when? I dont even remember they ever have set policies that really made sense and that had a lasting impact on market rates. And for that matter I have not seen Nikkei, Japanese stocks, nor any fx rates react to ANY economic releases that came out of Japan, NONE: Car sales, CPI (which cpi...;-), office vancancies, unemployment, and the many totally nonsense figures they report that have zero market impact because they actually mean nothing, not just to the market but to corporations (at least not at the time they are released, car manufacturers through their dealerships know way earlier about those numbers than when they are reported and plan accordingly). Whom are all those ridiculous numbers for that BoJ, Dept of Labor, MoF posts every other day? I have traded in Tokyo for a number of years and still am located in Tokyo so I think I can speak with a little experience backing up my opinions. But please correct me if you think you disagree. But I agree with your point that such fundamentals are what they are, metrics to which rates have to converge long-term, not in intraday or multi day operations. Traders therefore do have to care about probabilities of interventions. So, in summary yes I do care about whether I believe intervention is imminent. On the other side I believe very deeply that whether u/j is at 100, 80, 60, has nothing whatsoever to do with what Azumi and Co have to say or do, absolutely nothing. Btw, are you living in Japan? Or Asia for that matter? Your post hours suggest that ;-)