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Category Archives: Thoughts

This is where we share all our thoughts relating to the foreign exchange markets.

Was trying to get a feel for the range of the GBPUSD.

The 4H  –  High 1.3441, Low 1.2022, spot at about 23.8% retracement level

1H   –   HIgh 1.2560, Low 1.2119, spot just above 61.8% retracement level

It suggests that if there is positive news coming out of the UK that the 1H could breakout and then the 4H begins to be relevant.

Have to keep watching……………….

After, Yellen’s comments last Friday at Jackson Hole and the subsequent correction in the majors against the USD, I feel levels are now more reasonable reflecting the relative economic health of the countries. However, I believe, the GBP and JPY have more downside adjustment to be made.

Take a look at the 4H USDJPY, the JPY is now just under the 38.2% level, I believe there is more room for the JPY to weaken.

4H usdjpy

4H_eurusd

The EURUSD is showing an interesting pattern. Certainly compared to the GBP, it has shown more resilience.  I believe it’s because the EU has less problems and issues compared to the UK.

It seems to be creating a floor at 1.0980.

This week’s european PMIs came out steady and upbeat. I believe all we need is to see more positive growth news coming out of EU and the EURUSD should easily jump back up to 1.1388.

If ADP for the US comes out weak, it may just provide the impetus for the EUR to be bidded upwards, of course, the big move will come tomorrow during the non farm payroll numbers.

It’s looking interesting???!!!

Ever since Brexit accompanied by the economic problems in Japan, it appears that a trading opportunity is emerging.

As a safe heaven currency now, every time, negative comments are made of post-Brexit and EU, JPY is usually bidded up to 100 and sometimes higher at 98.98. I noticed that the JPY has hit 100 or better three times since post Brexit and each time rebounding back to 102.70 to 103.20.

Guess what it’s back up to 100.75 now, and moving at the 20% range of the stochastic curves.  Possible rebound back to 101, then to 102?

To play the plan vanilla options is not worth it as the vols are high resulting in elevated premiums.

What to do?  How to capture the potential opportunity?

I am glad David Cameron resigned as PM, he clearly didn’t get the confidence vote that he needed to keep the UK in the EU, so there’s no point in staying on, the people how silly as they have made their decision.

This made me reflect on Singapore.  As a Singaporean, I was quite concerned in the 2011 general elections when PAP won by an average of about 56%+, which was not great by Singapore standards, but a clear signal from the electorate that the people of Singapore were not happy with PAP.

I am so glad and encouraged that PAP, our government, my government, paid attention, took heed and spent the next few years engaging Singaporeans; by and large solving and resolving a number of pressing issues.  This culminated in PAP’s surprising victory in the 2015 elections with an average win of nearly 69%.

England, I am no longer referring to the UK anymore, because I believe the UK is gone!  If we trace back in history, the 18th century was the glory days of England and the UK.  It was the greatest empire in the world, ever since, then, England has been carving a downward path till today.

Though it would have been largely beneficial for the UK to stay in the EU, history tends to repeat itself, so the Brits again have made a poor decision which seals their fate and another negative chapter in the history of England.

Watch the world as it unfolds, Scotland will leave the UK and strike up its own deal with the EU.  North Ireland may join up with the rest of Ireland, and then, strike a deal with the EU.  Wales will also probably leave the UK, leaving the UK to just merely England.  That is what is going to happen, mark my words, it will all unfold in the next 5 years to 7 years.

England has lost everything, it no longer has a manufacturing base, all its brands are now owned by foreigners, up to 1/3 of the liquidity in the financial markets has been moved to Dubai, up to 45% of its exports is attributed to the EU, it has no innovation, it has no invention.

The only thing going for it is that it’s a services economy and that has been eroding the past few years and with Brexit, the pace will pick up.

So, all that is left is England an education centre, a financial markets centre and a strong pharmaceuticals industry.

How is England going to feed 46Million people in an environment where the country has matured and is greying, coupled with low growth, low productivity, burdensome welfare system, far too much burden on the shoulders of the young British people.

Scary!!!

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……………..

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.

 

 

 

 

 

The buzz in the media has started.  Some are saying that the FOMC event is fully priced in the marketplace and others are saying that high volatility is expected in this impending event.

Bernanke was interviewed last night and he was quoted saying that the Federal Reserve needs to entertain ‘negative interest rates’.

90% of all economists interviewed by Bloomberg and 95% of Wall Street all believe that Janet Yellen will pull the trigger at 3am Singapore time and 3pm NY time.

Will Janet pull out a surprise from her hat and not raise interest rates?!  She has every reason to raise interest rates and also every reason not to raise interest rates.

Wall Street is debating whether she is a traditional economist that needs empirical data to line up like the stars before she tightens monetary policy of will she act more from her ‘gut feel’ of where the economy is going.

The world today is different, inflation in many developed countries is almost non existent, way way below the 1% or low 1%.  We will not see 2% for a long time, simply because there is a real threat that the developed countries may go into a deflationary phase.  Oil below $40/- per barrel with fears that it will go to $20/- is unfounded.  The world was buzzing with strong economic growth in the late 90s and oil was at $20/- per barrel.  Demand will always be there no matter how much OPEC pumps out of the ground or Big Texas Oil.  The world has a fascination for the internal combustion engine for fast cars ,luxury cars and basic transportation.  Be it recession or not, people will fill up their petrol or diesel tanks and drive their vehicles proudly.

So why does a falling oil price be of such a concern?  Well, why did oil go up to $140/- per barrel in the first place?  I believe it was speculation, I believe it was more and more producers getting into the game and with high capex, they needed to sell it at the elevated prices, I believe it was oil sands or shale oil.  The cost of extracting oil went from $12/- per barrel to an average of $68/- per barrel.  Should Big Oil profiteer from the general public?

Real estate prices has been escalating in all developed countries from the UK to the US to Australia and Europe.  Every developed country is excluding food and real estate from the CPI basket, however, if you were to include real estate into the basket, then, we will not be looking at the current 1% inflation rate but something in the region of 10%.

So are we playing around with numbers?  Isn’t real estate or more appropriately, dwelling homes an important component to be included in the CPI basket as it affects the wallet of all consumers as in the ability to pay their mortgage payments and the fact that it is a long term financial commitment.

If we look at the EURUSD and the GBPUSD hourly charts with Fibonacci overlayed, it appears that the EUR is trading at its near high and GBP at its near bottom.

gbpusd_hourly

eurusd_hourly_fibo

If volatility is going to happen at the FOMC, will the two european currencies swing in opposite direction?

There so many permutations: –

Raise rates + dovish press conference

Raise rates + strong press conference

Rates stay put + dovish press conference

Rates stay put + strong press conference

In all 4 permutations, it can be argued for both a case of strong USD and a case for weak USD, why?  It is because the US is in a precarious economic position.  The truth is that the economy is not growing strong enough, moderate growth with some fragility, yes!

As time draws nearer, I am sure we will see more noise in the media.

Believing that this is a data is keenly watched by the market and BOE I decided to place my straddle 5 mins before 530pm

Expectations is 58.4. 

The details of my trade:-

Buy GBP, Stop if bid 1.5070

Sell GBP, Stop if offered 1.5030

Stop loss at spot 1.5050

As it turned out the reading came in much lower at 55.3. 

It triggered by 1.5030 level. Unfortunately it really didn’t go anywhere and finally I cut loss and bought back the GBP at 1.5037

So disappointing. 

Tonight ADP and JANET Yellen speaks?!

As the UK is also squarely looking at recovery and growth, data such as CPI, PPI and RPI becomes relevant on the radar screen.  CPI, PPI and RPI was schedule at 5:30pm Asia time.

I didn’t observe that much noise in the media but since it is a relevant data, I decided to place my straddle trade at 5:24pm with the following details: –

GBPUSD   –   1.5147   –   1.5167   –   1.5187

Spot was at 1.5167 and SLs at spot, Stop if Bid at 1.5187 and Stop if Offered at 1.5147

As it turned out CPI moved up slightly and market didn’t seem interested so at 6:18pm, I decided to square the position at 1.5210 for a trading profit of 23bps.