I am still a strong believer in the Australia economy and the Aussie Dollar. I believe the economy will turn around next year and that the current levels will be a thing of the past.
I decided to buy a plain vanilla call option, strike ATM spot with the following details: –
Spot 0.7140
Premium: 280
Breakeven: 0.7420
Expiry: 29 July 2016
Thanks to China, my AUDUSD call option expiry this Friday, August 28th will be worth nothing and I have basically lost my premium of US$3Million.
No wait a second, I didn’t. Apologies for the silence the last two days as you can well appreciate the financial markets, that is, the equity markets and the fx markets were crazy.
Given, all the bad news coming out from China; devaluing the renminbi, slowest growth in the past 5 years, PBOC cut interest rates twice and then again today, no short selling on 500 stocks in Shanghai and Shenzhen markets, lowering bank reserve ratios, buying less raw materials such as metals and ores, lowest exports in the past 4 years……………..all these pointed to China going down South!
This means SELL SELL SELL SELL AUDUSD!
So, silly me decided to be brave and stupid and chase the market, but of course with stop losses as well.
The deterioration in the AUD since last Friday from 0.7353 and downwards…………
The drop off the cliff on Monday at about 9pm Asia time, gapped from 0.7232 down to 0.7032, then, stabilising at 0.7142 and went back up to a high of 0.7232, right back where it started.
Last night, at about 8:50pm, my Ichimoku told me to sell the AUD, after cutting up and down two times within the last 24 hours, so I short the AUD at 0.7207. By 2am in the morning, the AUD has fallen to 0.7157. I decided to take profit and go to sleep for a trading profit of $1.25Million or 50bps on a nominal size of $25oMM.
So, I have now improved my call option losses from $3MM to a lower $1.75MM. You really can’t win all the time………life!
The real issue now is where do we go from here? Do we look at shorting the GBP and the EUR? Well, let me share my thoughts with you in my next article on ‘Thoughts’.
I also have a thought provoking view that a conspiracy was started by China to encourage if not compel Janet Yellen from raising interest rates next month. Again, I will share my thoughts with you soon, so stay tune.
Having a strong hunch that the BOE rate decision will be a volatile event, I decided to place a straddle trade at about 6:50pm: –
Spot: 1.5600
Stop if Bid; 1.5630, SL 1.5600
Stop if Offered; 1.5570, SL 1.5600
It was no surprise when the decision was announced, where the rate was held at 0.50% and asset purchase maintaining at 375Bn.
What is more important is what Carney is going to say. I was of the opinion that he would talk the GBP up as the UK wanted to cool down property prices as the property market was showing signs of a bubble. However, as it turned out the comments revolved around inflation and the fact that inflation went down to zero in June, rather far away from the target of 2%. I believe the UK should adjust its target going forward much like the U.S. In the case of the U.S., the inflation target was lowered from 2% to 1.6%.
Reasons given by Carney for the low inflation environment is because of low commodity prices and underutilized capacity.
As it turned out the GBP collapsed to a low of 1.5465, however, the real flows were at about 1.5488.
My trade was triggered but in the opposite direction from my hunch which was fine. It triggered the offer trade at 1.5570, and I squared the position at 1.5500 for a trading profit of 70bps on a trade size of 3Bn.
The GBP is now rising back to 1.5530 on slightly elevated unemployment claims out of the U.S.
This is a great lesson in not trying to second guess what the central banker is going to do, or for that fact, what the data is going to be, what’s more important is to ascertain whether the event is going to be a volatile one or not and if it is, then, my fx strategy will ALWAYS work!
What a TRADE! I am done for tonight!
After the AUDUSD went down again below 0.7300, I felt that there might be a short term retracement, so I decided to buy a one month call option expiring 28 August with the following details: –
Spot: 0.7275
Strike: 0.7300
Premium: 100bps
Breakeven: 0.7375
Let’s see what happens
The outstanding Greece issue, collapse of commodity prices and the collapse of the Shanghai and Shenzhen equity markets was all the right ingredients to push the AUDUSD below 0.7500, then, 0.7400.
RBA Stevens also reiterated in his statement while holding rates at 2% that further weakness in the AUD is expected and necessary because of weak commodity prices.
I have a different opinion and believe that the AUDUSD should be trading at a fair value of about 0.7700. Australia is not all about commodities, it has a strong agriculture based export industry, including dairy and other foodstuff. Health products and pharmaceuticals are also significant. Property market be it supported by Locals or foreigners is buoyant because of cheap mortgage rates.
I see AUDUSD spiking to 0.800 and then coming back down to the 0.7700 range within the next the next 3 months and our option is good for 4 months till end November.
Since the start of 2015, AUDUSD started out the year at about 0.7720 and hit a low of 0.7566 in March/April. A strong pike to 0.80 happened in late April and a new high for the year at 0.8115 in mid May. All fundamentals in Australia has been the same for the past 6 months, so will we see the pattern repeat itself? I believe so.
Spot: 0.7390
Strike: ATM spot
Premium: 200bps
Breakeven: 0.7590
Expiry: 27 November 2015
Since I did the trade on Feb 25th, I did not see daylight, till late March when it peaked at 0.7897 and then came off again.
Another opportunity came on April 29th when it hit a high of 0.8063. You will recall our breakeven was 0.8097 and the premium paid was 97bps. At that time, I could just square off the trade and made a negligible loss, but I decided to hold on to the position after all, I still have another month to go. After making the decision to hold off, the AUDUSD started coming off and high a bottom of 0.7811 on May 1st.
An opportunity came on May 13th when the AUDUSD hit 0.8116, I decided to square off the option by selling it. I made a very small profit of 19bps.
In reality after doing the trade in Feb, the onslaught thereafter of negative economic data out of Australia dashed by hopes of it ever recovering. So, on balance, I am just happy to get out almost breakeven.
It peaked on May 14th at 0.8160 and thereafter, it was a landslide all the way down to the current 0.7689.
Phew!
UK Claimant Count came out better at (6.50) versus expectations of (12.5).
GBPUSD, jumped 35 bps higher and holding at 1.5708.
I withdrew the OTM put spot order.
GBPUSD has been trending upwards the past week, while the EURUSD has been going the opposite direction.
I don’t believe the GBPUSD is sustainable and any negative economic data will see a significant reversal.
This time around will be a triple top; once on May 14th, another on May 22nd. Near this year’s high of 1.5780 on May 14th, happened once this year.
I am going to take a punt and do a OTM put trade: –
GBPUSD – Spot 1.5662; Stop if Offered at 1.5640 and SL at 1.5660
Let’s see what happens in the next few mins.
Did a GBPUSD trade hoping to catch some action on the release of the UK retail sales. UK and BOE looking at economy closely; housing prices, retail sales, and services PMI are data that will be volatile.
I decided to do a straddle: –
GBPUSD – Spot at 1.5600, Long Stop if Bid at 1.5625 and Short Stop if Offered at 1.5575.
The data came out in favour of the UK at 1.2% stronger than forecast of 0.4%.
However, the GBP didn’t really move that much, so I squared the position at 1.5660 for a trading profit of 35bps.
Given that the Federal Reserve is poised at raising interest rates this year as stated by Janet Yellen, clearly, all eyes are on employment data, GDP growth and consumption.
Today’s non farm payroll numbers is strong or weak will be a market mover. Wednesday’s ADP was an indication though a marginal one.
I decided to place my bets on a strong non farm payroll number and did a stop if offered sell EURUSD and GBPUSD with the following at 8:20pm: –
EURUSD – Spot at 1.1222, Sell Stop if Offered at 1.1190
GBPUSD – Spot at 1.5329, Sell Stop if Offered at 1.5300
The non farm payroll number came out strong at 280K verusus expectations of 222K.
EUR and GBP crashed.
I squared my positions half an hour later at 1.1100 and 1.5238 for a trading profit of 90bps and 62bps respectively.
Not bad!
I am born in the Year of the Tiger.
The Panthenon Investment Group 