Neither Tech nor Macro

Do you remember that AudUsd trade here. Since I have decided to trade the RBA rate decision but couldn’t cos it was early in the morning; I used its impact here after the London opening to enter long just above 1.030. I would have preferred something below 1.03 but missed it. The target is 50-60 pips higher and I will close it before NFP if it isn’t hit. The other blue lines are representing my call spread expiring on November 16′, out of the money so far.


I did take this quickie at 1.0312 because as I said here I don’t think the RBA cut is a big deal as it’s largely priced in. With 3.25% rate AUD is still the better place for carry traders mainly when rumors of massive easing from China are growing, and EM banks thinking to cut rates in response to the US QE. Furthermore the QEs money have nowhere to go but in risky assets.

What are the risk to this one?


1.The growing rumor that RBA is planning a string of rate cuts questioning the AUD carry currency status hence driving it south.


2: The pre NFP wait and see mood making it ranging below my entry level.


3: Positioning before NFP could push it quickly around the previous low, that is 1.015.

 

As I said in the week#40 intentions posted here. I shorted GBP with EurGbp long on the spot. Not the best moment but the level below 0.80 is not that bad. More on this later.

 

Why I am not closing it, that AudUsd quickie long posted here. Like I want to be right against the market, right? Frankly I would have closed below 1.028 if I haven’t good reasons to let it run til Nfp (just before the release):

1: First and foremost the risk taken is covered, because the AudUsd September line in my Fx portfolios is +187 pips in Green (2 weeks of trading cos of summer vacations). That trade was posted here, ; if I had kept it would be now be around +350p, but spot fx is not the place to shoulda woulda couda. So I am allowing 25% of that September trade to pay the stop of this one. The size of the quickie is smaller because it’s a quickie and as you know it I am already positioned with a call spread (blue lines), this gives me here a 135 pips for the stop. Risking 135 pips for 70 pips is not a good management behavior, absolutely. But in my way of trading I am not risking it for a 70p target but for my conviction and it’s that conviction that is covering the risk (September trade). This is where lies the difference between a systemic trader and me. In my view on Fx spot my MM rules are relative to both my analysis (macro, upcoming events, liquidity structure) and the R/R. With Options its paid in advance by the premium. On spot It’s paid in this case by 25% of what has been won on that instrument, if nothing I wouldn’t have taken this quickie. How I am risking these 135 pips $ equivalent is by modifying the spread strategy (adding other legs to transform it in another one) but it’s out of the scope of this thread. More interesting for a Fx spot trader is the 2nd point below. but let me just mention that hard stop orders are no more than easy free food for Specs.

2: Conviction is a moving beast, adapting constantly to diverging events and unstable liquidity structure. For this one; I am convinced (tho not absolutely) that the price is seeking liquidity around 1.016 and eventually will start pricing in a good NFP number before it’s released. Let’s see.

 

The so long awaited long. A recap of the trades posted in here. Jpy and Gbp.
Question is: why not Jpy vs Aud ? Just because the risk to this trade implied by the RBA decision was too heavy, since it's weighting already on the AUDUSD trade.

 

As said here , the target area for this EurJpy long is around the looming 102.00 level.This level I see as a liquidity cluster, is probably going to generate some turbulences, but I am not going to exit there rather probably add or wait. Why?

1: I am linking this trade to the one taken on UsdJpy posted here. That one target’s area is around the 80.00, and we have several resistances on the path . On the daily chart below we can see clearly how the liquidity distribution is stacked in 40 pips stairs from 78.70 to 80.50 (daily highs, rounded numbers, Ichimoku cloud base, 200DMA…). In terms of market dynamics these levels can perfectly generate a cascade until the 80.50 stops are tripped. The NFP pre or post release can be the catalyst to achieve this. That is the plan I am sticking with, and this will give the signal whether to exit the correlated EurJpy.

2: We can also have due to the NFP impact a south move way below the current level, this is where I will add to the UsdJpy (not to the EurJpy). Tho I am going to lock the EJ position 15 min before NFP not because the outcome can modify the trade drivers but because that EurJpy long was really badly timed and the entry level is too high (compare with the USDJPY). This timing problem was explained above. 15min before NFP is likely the moment the real big positioning is over.

3: I don’t use take profit orders cos I prefer to manage my exits dynamically according to the prevailing sentiment and the upcoming news or events. Take profit orders are established on liquidity distribution only, hence they can be useful when you are neutral about a given currency or when you leave for other stuff with fragile positions still running.

 

My plan on the €uro is starting to unfold, unfortunately as I explained in a previous post, I am very badly positioned @ 1.2990. So badly that I hedged the position by a put costing me in the worst case scenario -95p. Hence putting the true breakeven around 1.3080. Worse case scenario cos an option put has a time value that can significantly reduce its cost if sold way before expiry (That’s the beauty of options used as stop loss).


Anyway spot price now is above 1.30 but I am a bit in a rush, since new risks events are looming, like the fiscal cliff and more importantly the ugly economic condition of euro zone. Tho this is not really conflicting with what is driving the trade, that is real money re-balancing its portfolios after elimination of the EZ tail risk by Draghi’s OMTs. I have 3 running trades based on this , trades you can track in the previous posts:


EurGbp long at 79.95 now at +48 pips.

EurChf long at 1.2035 at +91pips. This one is a core position but I am not going to add to it since its moving very slowly.


I am closing the EurGbp with the +48p and maintaining the 2 others but I reduce my target area around 1.3170, meaning that at this level I will decide on how to manage the trades. The profit taking on the EurGbp is just to reduce the cost of the hedge on the EurUsd . But also I don’t want to be positioned ahead of NFP seeing that the entry level is not that far from the current price. Tho I am still considering shorting GBP from the highs after NFP release or next week.
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It was posted here, a quickie badly planned that dropped right after entering the position. With great difficulty, I explained that I was not going to close it despite more than 100 pips draw-down.

This kind of trade don’t worth it, but I think it’s an opportunity e to share here some concepts about trading spot forex and derivatives.

1: The market is always focusing on one thing at a time. But the following events, although out of focus, limit the upside/downside movements.

2: An upcoming event on which the market is focusing is always discounted / priced in before its release, either totally or partially on the base of the global anticipation / consensus.

3: This behavior ignore the prevailing sentiment, although that sentiment can limit its scope.

4: To be achieved this dynamic needs liquidity, and when the anticipation is bullish the market will go south (plummet) to buy it at a cheaper price and vice versa if the anticipation is bearish.

5: When the event’s outcome is released, if it’s in line with what was discounted the market will reverse the move in the well known “buy the rumor sell the fact” or vice versa.

6: If the event is way far from what was expected, this usually trigger massive repositioning in a liquidity desert on the opposite side, hence the big gaps/candles to find a counterpart.

Concerning that AUSUSD stupid trade, I posted here that I am not closing it because the market will start this Friday to price in the consensus about a good NFP number and, before that, it will need liquidity near the previous lows around 1.017. before heading north. It is what it did and still doing.

Conclusion: These concepts are very difficult to master and are mainly used by coordinated big Specs. They never do it out of the blue, but with the help of catalysts (like an exaggerated reaction to an anticipated rate cut or an attracting option barrier). The big danger to this, is that it is very sensitive to headlines bombs (unexpected news during the positioning). For the retail trader, knowing these concepts help to stay away from that game and avoid doing mistakes. But more important it enlighten on how useless can be systematic strategies when you start asking yourself “What’s going on?”

 

As I mentioned in week#40 intentions, I am looking at shorting Gbp. The cable is a strange beast with erratic behavior mainly because its lacking liquidity. I started doing it on EurGbp, I closed with +48pips here because it was positioned too high in the range and could be hurt during the NFP.


The incentives behind this are quite clear:

1: GBP played the role of an opportunistic European not €uro based safe haven during the Euro Zone crisis. Draghi’s OMT is eliminating the tail risk, hence no need for a safe haven based on an unstable and inflationary economic outlook (UK that is).

2: This thing is overbought.

3: Nice techs levels are not far, around 1.6250-1.6280 and above.


Risks to the trade:

UK is tightly linked to EMU, same thing for both currencies. Anything pushing the EurUsd higher can by correlation attract the cable on the same path. Though this is attenuated by the recent EurGbp flows.


Conclusion I am pending at 1.6265 if it goes there (with the help of the NFP dynamics). I wouldn’t short it unless it get there, to fully profit from its stretched positioning.

 

EurJpy Locked as planned, no fuss that trade was badly timed compared to the one taken on USDJPY. Actual positions
EurJpy: +250 pips
UsdJpy 140p
USDJPY is heavier in size because it's slower (60% of EurJpy range).
Have a good weekend.

 

A boring week probably because the market is looking for a clear direction. These kind of moments are Techs friendly mainly on H4. But I never play with techs only.

Let me recap briefly what I did since NFP.

EurUsd long closed with +17 pips after deducting the option time value used to hedge this position. The initial plan is s going to need more time to unfold for several reasons. First, the current focus is on the Spanish bailout but Germany is asking Spain to wait before requesting it, Shaeuble even said that Spain doesn’t need help. Also Rajoy is loosing ground on the political front and will probably not ask for help before the regional vote on October 21st. Until then I see the Euro between 1.28 and 1.30, but ultimately, because of real money flows, it will touch the 1.33 area; hardly higher seeing the bad growth perspectives in the EZ and the structural need of a weaker Euro to sustain it. On a shorter term I will probably buy it again near 1.2820 if it get there.

AudUsd long, closed with -55 pips after NFP when seeing that even after the surprise of an unemployment rate below 8% it didn’t gather momentum to reach the highs of the current range as other risky assets did. When the market start questioning the prevailing status of a currency, it’s time to stay away from it. AUD is still interesting for carry traders, but one sentiment is growing among econ analysts predicting that it’s the end of 22 years of continuous growth in Australia, because the economy is overheated by China demand that is now collapsing. I can see AudUsd going way below parity and if the next NFP is really good this can signal that Chinese economy will rebound helped by the US demand, therefore the AUD can rally again to its previous highs. For now I am neutral on it as it’s mainly technically driven.

GbpUsd pending short too high in the range was not filled , but the prediction here of GBP plummeting seems right. It’s very clear versus the Euro and it’s going to be amplified vs the Usd. The reasons are those mentioned in this post. As I am bearish on GBP, I am waiting for some catalysts to bring it higher in the range before fading it.

JPY’s longs made lot of pips after Nfp, still had a half size running vs USD because this one is very well positioned and is as I said protected by the fear of BOJ intervention at these low levels.

Conclusion: Last week was a good one even tho I was badly positioned on EurUsd and AudUsd. The total loss is around -55 (AudUsd) pips compared to more than +200 pips winners. For the current week I am ,as is the market, in a stand by mode and have no position clearly pending or running (beside the half USDJPY).