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Monthly Archives: March 2016

On Monday morning, I looked at the charts of the 4 majors and noticed that late US session on Friday, the USD was starting to claw back some ground.

I felt strongly that my hunch of a USD reversal is on the cards!

So I decided to get pricing to buy ATM put options expiring 29 April 2016 with the following details: –

EURUSD   –   Spot 1.1253, Premium 140bps, B/E 1.1113

GBPUSD   –   Spot 1.1253, Premium 180bps, B/E 1.1.4282

USDJPY   –   Spot 111.47, Premium 1.27bps, B/E 112.74

AUDUSD   –   Spot 0.7596, Premium 106bps, B/E 0.7490

I decided to execute all 4 put options with notional amounts of US$100Mn each.

It’s 6:38pm on Tuesday evening and where is the spot rate for the majors?  Well, it’s: –

EURUSD  –  1.1211

GBPUSD  –  1.4276

USDJPY  –  111.62

AUDUSD  –  0.7592

Looks like I am also breakeven on my GBP, a little ways for the rest, however, as I mentioned earlier, I feel strong that there will be a USD reversal within the next 30 days.

I mean look at how the majors moved against the USD at FOMC and more so post FOMC, on average about 400bps moves against the USD.

I don’t believe for a moment that these counties can survive on such strong currency valuations when their respective economies are anemic.

Ok, fingers crossed and toes crossed!!!

Good luck in your trading.

Since last Friday, the back of my neck was feeling itchy and I couldn’t thinking that the USD was oversold after the FOMC.

I decided to look at the 4H charts on the GBP, EUR, JPY and AUD and here they are: –

4H_usdjpy

4H_eurusd

4H_audusd

From a technical point of view, isn’t a USD reversal a high probability???

Janet Yellen’s speech and Q&A did not warrant such a strong sell down in the USD, this is my personal opinion.

I am looking at buying put options against the majors till maybe end of April, will have to check the premiums to ascertain whether it’s expensive or not.

The saga continues……………..

You will recall that I was a strong believer in the AUD and the Australian so much so that I bought two large call options.

The first with the following details: –

Spot: 0.7015

Premium: 288bps

Breakeven: 0.7303

Expiring 26 August 2016

I decided not to stare good fortune in the face and sold the option at 0.7603 for a 300bps trading profit.

Though the absolute amount of the trading profit is nice at US$5.4Million, from a risk reward ratio of near 1:1 (as the option cost me US$5Million), it wasn’t exactly a good trade.

However, I was not about to continue waiting for the Australia economy, I have somewhat lost faith in its rebalancing and rejuvenation away from mining.

The remaining AUDUSD call option expiring 9 July 2016 has a breakeven of 0.7420, I will take a chance and keep this option as I still have time on my side and who knows, maybe, some of the private banks are correct when they are forecasting AUDUSD at 0.7900 within the next 3 months.

I also put in a trade for the GBPUSD with the following details: –

GBPUSD   –   Stop if Offered at 1.4080 with SL at 1.4110, Spot at 1.4121, Stop if Bid at 1.4150 with SL at 1.4130

When the GBPUSD launched to the sky, it triggered my 1.4150 trade.

I squared it at 1.4236 for a trading profit of 115bps.  Including the 44bps from the EURUSD, FOMC allowed me to make a total trading profit of 159bps.

Thank you.

Time to try and sleep now.

Today’s FOMC was anticipated to be fairly volatile, with the market largely managing expectations.

Nonetheless, I expected an opportunity to carve out a trade.

At 1.55am, I put in my straddle with the following details: –

EURUSD   –   Stop if Offered at 1.1050 with SL 1.1070, Spot at 1.1086, Stop if Bid at 1.1130 with SL at 1.1110

As it turned out, rates was kept steady at 0.50%, and statement indicated a possible further two hikes for 2016.

Fed acknowledges global slowdown and uncertainty, more importantly, it recognizes global risks may impact the U.S.

The EURUSD burst upwards triggering my Stop if Bid trade at 1.1130, I waited till about 2:08am and squared the trade at 1.1074 for a trading profit of 44bps.

I am done, not going to wait for the press conference.  As usual, don’t like to chase a trade during the press conference, it’s too volatile.

 

Oil has been touted as the culprit that has caused countries all over the world to experience slower economic growth and also why inflation simply cannot rise, but WHY?  Is oil truly the culprit?  I say, NO!

Remember post millennium, the period from 2002 to 2006 when the whole world was booming, what was the price of oil? You guessed it right, it was at an average of $40/- per barrel.  What happened next was that Wall Street through the derivative boys started to speculate on Black Gold, driving the prices higher up to the peak in July 2008 at $145/- just before the crash of Wall Street.  This created an opportunity for new producers to come online, including alternate oil sands and shale oil.  Though their cost of production was in the range of $45 to $70 per barrel, it was still profitable because Black Gold was up there in the $100/- per barrel price range.

Capital started moving into the oil and gas industry and the supporting industries including logistics, marine, steel, etc.  Cities in Alberta, Canada which was previously a sleepy city became the darling in Canada, people moved, property prices rose. The same thing happened in Texas and Florida, United States and also in Brazil.

Fundamentally, what also changed in the oil and gas industry is the way exploration was financed.  Traditionally, new exploration was usually financed with equity.  However, with the escalating oil prices, banks, capital markets and debt markets became more aggressive in financing new exploration with debt financing and lending based on future cash flow.  The amount of capital that went into the oil and gas industry from 2007 to 2014 was in excess of $1 Trillion.  The global market capitalization of O&G companies was above $6Trillion in June 2014 when oil was at $110/- per barrel.  Today, the market capitalization has fallen by more than  half to $2.48Trillion at today’s oil prices of $31/- per barrel.

More importantly, in the past 5 years of the total capital raised from the capital markets and debt markets to fund and fuel businesses, more than 50% of these capital went to the O&G sector.  In other words, we saw huge swings towards one sector and the concentration risk of capital and resources into the O&G sector.  This is not healthy for any economy to be highly depended on one sector.

To make matters worse, more and more businesses decided to get involved in the supply chain of Black Gold from EPC, to stainless steel factories, to marine engineering firms, to shipping lines, all wanting a piece of this lucrative pie.

Much like what happened in Australia during the mining boom, Perth became the sweetheart city in Australia with people flocking to live there because it was closer to the mines.  Capital and lending mostly went  to the mining sector.  Salaries were also double that of lawyers and general doctors.  When China slowed down what happened to western Australia and the mining industry?  Collapsed!  Today, Australia is going through a painful process of rebalancing its economy to go back to a more broad based economy.

So, it was no surprise when oil prices started to fall in 2015, especially, when it hit below $40/- that pain would be felt throughout the supply chain.  Did the price of oil fall because of poor economic growth globally? No!

Oil prices fell because the Middle Eastern, the largest Black Gold producers in the world was fed up with other countries taking away their rice bowl.  So, the Middle Eastern started flooding the market by increasing the supply in the marketplace.  This had the effect of driving the price of oil down significantly to its current levels.

Basically, the Middle Easterns wants to ‘kill’ the new oil producers, reduce the number of players in the global arena before they curtail supply and let prices rise again.  At the current price of crude oil, quite a significant number of producers will have to close down because of the negative carry and higher debt cost.  A number of them in the U.S., and Latin America have already collapsed.  Of course, that means everyone connected to the O&G sector is also going to get hurt including the supporting industries.  However, this is to be expected because the respective economies around the world which was previously, biased in O&G, now need to rebalance its economy to a more broad base one.

This is going to take time and the Middle Easterns are in no hurry as their cost of production is in the $6 to $8 per barrel range, so they are still making billions of dollars with oil prices at $38 per barrel.

 

 

 

 

 

Alot of noise was buzzing in the media, some FIs were expecting big moves and other lesser moves.

Mostly all in consensus that Draghi will give out something better this time around, then, again, some felt that it will be a non event like the last time.  Volatility also spiked up and shorts we scaled back compared to December 2015.

I decided to put in a wider straddle with the following details at 8:40pm: –

EURUSD  –  Stop if Offered; 1.0930 SL 1.0950, Spot; 1.0966, Stop if Bid; 1.1000, SL 1.0980

As it turned out, the refinancing rate was cut to 0% from 0.05% and the widely expected cut in deposit rates of 0.10% to negative 0.40% from -0.30% was offered and asset purchases we expanded from EUR60Bn to EUR80Bn.

EURUSD went south immediately to 1.0870 and held there for a while and then a few minutes ago, went slightly further down to 1.0835, I decided to square the position at 1.0860.  Spot is now 1.0867.  Locked in trading profits of 70bps!

Thank you Mario Draghi!

Will I be participating in the market later during the press conference?  Don’t know, maybe and maybe not, but certainly I will be in front of the screen and listening into the press conference.