Archive for the ‘Carry trade’ Category

293homealone121107.jpgWell, maybe while you were getting ready for bed. The Federal Reserve Bank decided to make an emergency move this evening and cut the bank lending rate to 3.25 percent from the 3.50 percent it was at earlier. This move made by the Fed was meant to “try” and create some stability in the financial markets. Also, at the same time, Bear Stearns (BSC) is being bought out by JP Morgan (JPM) at a steal of a price. This last minute buyout and the move by the Fed (who also approved this buy out by guaranteeing the deal with $30 billion) had an immediate effect on the overseas market and crushed the dollar. The EUR/USD hit a high of 1.5905 and the YEN hit 12 year low against the dollar at 95.74. Gold also was trading (at time of posting) around 1,026 an ounce. (I guess there goes the gold teeth I was considering!)

One way to help you against the falling value of your dollar is to hedge against it with the other currencies like going long the Euro or even long the Yen. Any trading against the dollar seems to be the most logical move. When asked what should be done about the financial crisis in the US, Federal Reserve chairman Ben Bernanke said “I don’t know!” No wonder the dollar is crashing and the basic carry trade is dead.

Well, hedge your bet for now or wait and see if the fed moves some more on Tuesday with another cut of 75 basis point. Bernankes strategy seems to be trying to keep the economy supported and worry about inflation later. We may see on the EUR/USD 1.6000 before Tuesday if the market sees even more weakness. Also, the USD/JPY may see an even lower level below 95.00 as weakness in the dollar continues. Tomorrow is a new day.

~ G


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stocks.jpg Shocking and unsurprisingly stocks went down in a heavy bone-crunching thud today! Bam! We’ve seen this coming for months, talked about it here, fundamentals have been getting nasty in the US (hi, financials, thanks mortgage/real estate) and it showed up as a long term double top on the US indexes (see S&P500 chart beside this) and now a gigantic break below support today.

Wasn’t this what we were looking out for on Monday? 🙂

istock_000003880585xsmall.jpg This has all sorts of implications for currencies, the least of which are “unwinds” in carry trades involving the yen and franc. So the strategy is real, real simple here: if you haven’t already look for trades involving these as they continue to strengthen. And enjoy raking in the pips.

Once again, stocks lead most currencies (the counterparts of the yen and franc in the carry trades) most of the time except at important turning points like the last couple of days.

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intrmarket.jpg Today is the first day I look at the S&P500 ($SPX) – representing the average of US stocks – and think “this may be a pennant”. If I can get a triangle shape out of short term support and resistance, it’s a pennant. And price coiling like this at support is pretty threatening to that support. Not good for stocks.

Interestingly, I found myself thinking of the GBP/JPY which already broke lower. US stocks may be a bit of a “barometer” for other markets, but smart money often leads in other markets, such as currencies. Looking at the GBP/JPY works just fine because it is a major carry pair. The carry trade is a canary in the market mine: it is very sensitive to global economic changes..

leadership.jpgIt’s a negative feedback cycle. Odds of stocks breaking lower increase with the pennant coiling at support, and the break lower already of GBP/JPY. If stocks do break, this will fuel GBP/JPY further.

* By the way, I don’t say this enough, but if you’re new to trading do not feel like you have to know all of this! All different people read this blog, and the intent is education. I find things like this intermarket analysis business give me a little edge here and there in trading. The great bulk, though, is mastering a trading style by sticking with certain rules consistently. Then you add little stuff like this. Keep reading things like this with your “observer’s cap” on and it gradually sinks in.

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gbpjpy2.jpg Now that the pair trounced the bulls with a bone-crunching thud, what next? After a nice consolidation that looked pretty flag-like (on a short term timescale), it broke lower some more overnight. It fell a few hundred more pips (!) and has now retraced back up to where it broke out from.

Looked at on an hourly timescale, I’d expect this to retest former support of the flag, as resistance now, and then fall some more. On the chart here (click to enlarge), I threw a CCI on to illustrate the “reject the zero” principle for the CCI, by the way. Notice how when it fell overnight, it fell coming off of hitting the zero CCI line, as if that was resistance. Sometimes the zero acts like support/resistance, hence “reject the zero”. It’s now at the zero again, and the CCI is decelerating. Being at actual resistance in price, it would be unsurprising if it didn’t bounce lower sometime soon.

The awesome thing about going against the carry, or shorting this pair and paying interest, is the ferocity of the down-moves. When the GBP/JPY heads south, it hustles doubletime.

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yearendcomp.jpg Here is the year in review as a comparison chart (left, click to enlarge) comparing the major currencies, in this case versus the euro. The worst performing currencies, the USD and GBP, were down about 9% vs. the euro. The best, the loonie, was up about 9%%.

What happened this year?

The year had a lot of positives for most currencies: the global economy was booming, and so commodity currencies economies sold lots of stuff!

But this always only goes so far. Inflation ramped up, and central banks began lowering interest rates.

Then came the U.S. real estate mess.  Interest rates were higher than they were a few years ago, and lots of folks got hit hard as their short-term get-me-in mortgages forced them to refi at a higher rate. Many defaulted. Supply started flooding thet market and things slowed way, way down in real estate, didn’t they?

Not only that but bond portfolios related to all of this started going bad. Lots of funds with exposure to real estate and mortgages got hit hard. Banks started trusting each other less, making it harder yet to access cheap loans. Fear entered the market and the Fed lowered rates more, the dollar tanked, governments started diversifying out of dollars and into things like euros, economies started showing signs of flagging … ah, ’07!

180px-john_william_waterhouse_-_the_crystal_ball.jpg Looking forward:

Commodities still look strong. The dollar still looks weak, the euro strong. The carry trade – shorting low interest paying currencies such as the JPY and CHF – may only be just getting started in its unwind. As economies around he world slow, people start peeling their bets back, and many of the bets were paid in yen or francs, so that increases their value as they are bought back up. A little bit of discussion regarding the fundamentals can sure help shed some light on interpreting this comp chart. Remember, though, at the end of the day it simply comes down to following a good trend (ahem, looking for opportunities to buy euros) and using a simple method to time your entry into that.

 ( “The Crystal Ball” by John William Waterhouse: scrying in crystal)

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leadership.jpg     We’ve talked a bit here and on the Investools FX website (I know David Settle has talked a bunch about it) over the past couple months how carry currencies haven’t risen to their same highs as stocks did when they both rebounded in the last couple months. Basically, stocks were getting giddy, carrys realistic.

    Even though currencies have taken their lead from stocks, think of this as more like a barometer: the U.S. economy is in a leadershipposition, and things have been reacting to this. In the last few days, worries over this have helped push most currencies down.

    Did anyone notice, though, how this day started out? Stocks up, currencies down. Now most currencies are really down … and so are stocks. Just like the foresight the carry trade had not to go as high as stocks, so today the two diverged before following the lead of currencies. Keep an eye out for little divergences like this. We’ve just seen a long term one (that’s been happening for weeks) and a short term one (just today) and both were useful. The smart money can give you, one of the smart-money trades, a great heads up!

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What the heck is going on today? That’s rhetorical – basically what’s going on is “risk aversion”. Which means everyone has decided they’re scared and they’re running into holes all over the place. It’s jitters over the world economy.

All you need to know is that the carry trade does great when all is well, it doesn’t when things look bad – like, now – so look out below. Don’t try and second guess this thing, thinking it’ll pop back up any second and it will all be roses again. I’ve done that and got owned. But watch. Most pairs which pay a heavy interest payment are coming on some strong support levels (AUD/JPY below at its last fibonacci support). A lot of damage has been done. If they keep going they have much further to fall.

And of course, but the yen and franc as you get buy signals.


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