Reflection and Prediction

Friday, December 26th 2014

Hello everybody, it has been a while since I last posted my trades on this blog. I have been busy the last few months and there’s really no “analysis” to do when my bot is the one executing trades. No worries, though, we will be back in January with our daily dose of trades and technical analysis!

Thank you so much for everyone who followed the blog and all the readers. It was a fun experience trying to set this blog up. I’m still learning everyday how to put up an interesting, thoughtful, and useful analysis & commentaries about the global market.

Having said that, I want to post a short post reflecting 2014 and what 2015 will bring. Enjoy!

Rearview Mirror

2014 was a year of dichotomy. Continuing US recovery vs Eurozone recession, All-time-high in equity vs Freefall in commodities, End of Fed’s monetary expansion vs BOJ doubling down on easing.

Here are some interesting highlights of 2014 in no particular order:

• Draghi was cutting with full force but until a real fiscal unity happens, their asset purchase program is toothless.
• Jobs number in the US looked great but the internals are worrying.
• Republicans took control both Congress.
• Scotland stayed in the UK.
• Eurozone (still) looked fragile.
• US Congress passed a last minute to roll back Dodd-Frank bill restricting prop trading with customers’ money. Jamie Dimon was whipping the votes. Back to pre-2008 we come.
• US Dollar is very… very strong.
• Gold crashed.
• Oil crashed. Brought Russia along with them. Thanks to Saudis!
• S&P 500 all time high! Wealth effect!!!
• Federal Reserve ended its QE program.
• BOJ doubled down on their QE to an unprecedented amount.

Looking Ahead

What will be the most interesting event in 2015? I believe the most obvious answer is oil. When (not if) will the oil price start to rise again? When will the Saudis finally feel the effect of depressed oil price? How will the US shale producers react? What will Putin do? These questions will be answered throughout 2015 and I am really curious to see how it unfolds.

What’s next for gold? Will it rebound? Will S&P500 finally correct? I am not even going to comment on these questions as I have been proven wrong time and time again about S&P 500. However, with the QE program finally ended, will the flow of money to equity finally stopped?

On the political theatre, Obama vs Republicans. Will there be a budget standoffs threatening the credit worthiness of United States in 2015? It is possible. Obama seemed very belligerent after Republicans sweeping victory in the midterms. He started to take initiatives on net neutrality and immigration and this might not bode well with the newly powerful Republicans in 2015.

US Dollar has been on a roll in 2014. Can it sustain the momentum? I am inclined to say it will not but we’ll have to wait and see.

Eurozone has been fairly quiet last year but will it stay that way? Is Greece going to have another crisis? If so, will Draghi able to calm the market?

2015 will be a very interesting year as traders. I hope we can profit and learn a great deal next year. Meanwhile, enjoy the festivities and your loved ones.

Happy Trading and Happy Holidays. See you bright and early in 2015!

Treat from the Far East

Sunday, November 2nd 2014

BOJ Shock and Awe

Happy Halloween! BOJ surprised the market on Friday with expanding their already massive QQE scheme. The board is split with Kuroda as the deciding vote in a 5-4 majority to increase the money printing program to 80 trillion Yen, up from 60-70 trillion per annum. In addition to that, Japanese Government Pension Investment Funds (GPIF) also shifted asset allocation to lower JGB from 60% to 35%, increase domestic stock holdings from 12% to 25% and they are now even buying up foreign stocks up to 25% of their allocation.

Nikkei soared about 1000 points after the announcement and closed around 5% higher to its highest level since around 2007. Stocks around the world also soared with S&P500 Futures reached an all time high. Japanese Yen tanked across the board with USD/JPY went up 3 handles from 109 to 112.

These two announcements were clearly choreographed to achieve maximum effect in combating several decades of deflation in the Japanese economy. BOJ cut its forecast for inflation and GDP growth for the year and they are now going to miss the 2% inflation target especially with oil price weighing on price around the world. This decision by Kuroda is certainly a surprise especially comes just days after the Federal Reserve actually completed their QE program in the US this month.

During the press conference, BOJ Governor Kuroda was clear in his message that the measure introduced this month should not be construed as “incremental” and he is willing to do everything to achieve the 2% inflation target.

What Now?

I think the biggest loser with this announcement is the European Union as ECB is still struggling to achieve their own inflation target. Unfortunately, the Euro has been battered because of the recent bad news coming out of the region. They are also set to enter a triple dip recession soon. Will Draghi be more dovish in their meeting this coming Thursday?

This week we are going to see a few more Central Banks decision and several high impact data so I expect further volatility.

• RBA Rate Decision (Monday evening)
• NZ Employment data (Tuesday afternoon)
• US Midterm Election (Tuesday all day)
• Australia Employment data (Wednesday evening)
• BOE Rate Decision (Thursday morning)
• ECB Rate Decision (Thursday morning)
• US NFP (Friday morning)

The Trades

I entered several “long JPY” trade this past week with a very small starter position. These pairs have all been stopped out for small losses. Managed to made it up with a daytrade shorting NZD/USD on Friday as shown above.

The Outlook

At this point, all bets are off, really. However, seeing that there is no Japanese data this coming week, we have to shift our focus to the other pairs. I am slightly bearish on AUD and NZD especially with their employment data this week. As far as GBP and EUR, I am not expecting any major surprises but Draghi might be a little bit more dovish as well. Since the rate in EU region is at record low, I don’t think they will lower it further to 0%.

US NFP can go either way but coupled with the midterm, this week might be unpredictable for the Dollar. I find it hard to believe that the NFP can beat 229k estimates but if they manage to pull a surprise and Draghi was more dovish then USD might be in for a move upwards.

It will be an exciting week again and I wish you the best of luck for your trades.

Pump and Dump

It has been a while since I wrote something on this blog. I have actually been extremely busy and did not daytrade whatsoever. Since the nature of this blog is to serve as daily journal for my trades, I had nothing to write about. In addition to that, last week economic data was fairly tame and there is no major moves in the market. I somewhat expected this, as we had a major market move two weeks ago.

Fortunately, the wait is now over! This week, we will see some major economic data & statements come out which should move the market again.

• FOMC Rate Decision/Statement
• RBNZ Rate Decision/Statement
• BOJ Rate Decision/Statement
• US & Canada Preliminary GDP
• Euro & German CPI

That’s three (3) central bank rate decisions, two (2) GDP results, and crucial CPI data coming out this week. Brace yourself it’ll be a doozy.

Potential Pump & Dump?

As of Tuesday, October 28th when this article was written, there were 8 up days out of 9 trading days since October 15th when market seemed to “bottom out”. Is this a dead cat bounce or a real rally? The answer is I don’t know. As I mentioned in this previous article, anyone who said they know something is either spewing out bullshit or they have that $9.99/mo central bank newsletter. Having said that, I believe this is just a dead cat bounce. There are a few reasons why I think this is the case.

Punchbowl No Longer

FOMC Balance Sheet (Source: FRED)

The Fed balance sheet has grown significantly since the start of recession in 2008. They have now accumulating over $4 trillion in assets which is over 20% of US GDP. The question here are twofold, can the Fed stop growing their assets? and how will the credit and equity market react when they are start letting these papers mature or even winding down the position?

The first question seems easy to answer, it looks like they will finally stop expanding in October 2014. This FOMC meeting should end the bond buying program as scheduled. I am not expecting any surprises here.

However, the end of bond buying program this month will bring the second question into the headline. How will the market react when the punchbowl is taken away from the system? It was borderline comical seeing the market’s kneejerk reaction when Jim Bullard of St. Louis Fed said “Fed should consider delay in ending QE”. Market soared since that statement for the entire week. Is this really the mark of a healthy market? Think about it, a five (5) days plunge in the market can only be stopped by a Fed governor basically spoke to extend the punchbowl before market will rally again. I’m not one for crazy theory but it sure seems the market participants are addicted to this QE program and will do anything to keep the drugs running.

Mind you, stopping the QE is just the first step in going back to normal Fed operations. They still need to raise interest rate and unwind their position. God knows what will happen to the bond yield when everyone is rushing out the door at the whiff of Fed’s unwinding its holdings.

Global Picture is (still) Ugly

Global Unemployment Rate (Source: Eurostat)

Eurozone has been plagued by malaise for years now. Even when US Economy improved after recession, Eurozone countries were mired in their sovereign debt crisis which further deteriorate their already weak demand. As I mentioned previously, they are set to enter a triple dip recession in Europe this quarter. European confidence index slipped to its lowest figure in a year and their unemployment rate is still extremely elevated at over 11%. Without confidence and jobs, demand is weak which in turn drives inflation in Eurozone to be (way) below ECB 2% target.

Germany, the driver of Eurozone, is looking weak, in addition to the decline in export data from several weeks ago (which will drag them into recession in Q3), their IFO Business Confidence index is at its lowest point since 2012 as well.

Japan is another basket case (and has been for decades now). The issue is exarcebated in Japan as their working age population is now declining as they get older. They need to quickly find the magic to spur export as well as domestic consumption. Abenomics is not working and the VAT increase has only dragged the aggregate demand even lower. Bank of Japan is expected to announce an extension to Quantitative and Qualitative Easing (QQE) scheme in December meeting. This QQE extension should theoretically should spur Nikkei upwards but I remain cautious on this as this is a massive undertakings, even surpassing the effort from FOMC during The Great Recession.

How to trade this?

I have been building a “long JPY’ position across the board the past week. These positions are extremely small and they are basically shorting EUR, CHF, and GBP against JPY. Reason being is that I am skeptical about how the extension of QQE scheme will work in Japan and weakness in Nikkei will translate into a strong Yen.

Currency Wars Episode V: The Dollarempire Strikes Back?

Pardon my lame attempt at joke but yesterday we saw the dollar strengthen across the board following huge decline the day before. What does this mean for the dollar? Honestly, I don’t know. Nobody does, really. Anyone who tells you otherwise is full of shit (or they work in a central bank and secretly knows what’s the next policy move is going to be… Hey, I want in on that $9.99/mo secret central bank newsletter too!).

That said, I still believe, all things being equal, we should see the dollar weakens because the move upwards in Dollar had been relentless until several days ago, Fed is clearly telegraphing that we are not getting strong Dollar just yet, and the US equity market is not looking bright entering the earnings season this month. However, there are a couple strong caveats (a.k.a ‘Black Swan Event’) that might derail my hypothesis.

Deutschland in Trouble

German factory order

This week German export number came out and it looked grim with a decline of 5.7% month over month. This is the biggest monthly fall in more than 5.5 years and impacted by the continued Russian sanction by the EU as well as weak Eurozone demand in general. This week also featured Germany industrial production declined 4% vs a decline of 1.5% estimated by economists. Again, biggest fall since 2009. Lastly, Eurozone investor confidence has declined for nine straight months.

Prior to this week, Germany’s GDP also shrunk 0.2% in Q2 thus barring a “miracle”, Germany will technically go into (triple-dip) recession next quarter. Yikes.

What does this mean for the Dollar? Well, Germany is Europe’s biggest economy and the Euro is weighted approximately 56% in the dollar index thus any weakness in Germany (and by extension, the Euro) will send the Dollar straight up.

Abenomics is a Dud

Japan leading indicator

Our next “Black Swan” event might come from the far east as Japan leading indicators came out this week and the figure fell to 108.5 according to the Cabinet Office. This is the first fall since June 2014 and prompted a change in language in regards to their economic assessment from “weakening” to “signaling a possible turning point”. This downgrade in language indicates Japan has, for all intents and purposes, provisionally admitted that their economy fell into recession.

Many blamed Abenomics and the increase in VAT earlier this year to be the culprit.

How do we trade this?

Recent economics data have looked bleak for everybody. US equity is on shifting sands going into earnings season, Eurozone & Japan might be heading into yet another recession, Aussie employment number was atrocious, and so on. What matters now is who will be the “cleanest shirt in a dirty laundry basket”. If history can tell us, the US has always been the “least bad” among the bunch.

On that note, perhaps, rather than focusing on the Dollar (which move might be opaque due to reasons above), we should focus on shorting the Euro as they inevitably tumble into triple-dip recession in Q3.

Fly Away Like a Dove

Wednesday, October 8th 2014

Today’s post is going to be a little different. I do not have a closed trade as of yet. I’ve been building short dollar position since Tuesday.

Open Trades

I currently have 2 lots of USD/CHF short open. One lot was from 0.96000 and the other two are from 0.95750. In addition to this, I also have a half lot short USD/CAD position from 1.1150.

Why a dovish Fed makes sense

Today was a huge day for Dollar short traders. The Fed minute came out and it was much more dovish than expected.

Some powerful quotes from the minutes released today:

“Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector,”

“Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk.

This minute shows for the first time that the Fed is giving a second thought about quickly raising rates due to the disinflationary impact of a strong currency and further concern about global growth will hold inflation rate to below their 2% target.

In addition to that, there was also a push for further clarity that rate increase will be data dependent which shows investors that the Fed is more flexible than initially thought.

In my opinion, this makes a lot of sense given the nonfarm payroll figure, while looking great on the latest headline, is still hobbling when we dive deeper into it. Some examples of the weak “internals” of the supposedly strong job data last week:

• 102 million adult are not in labor force or unemployed. This is approximately 41% of adult population.
• Youth unemployment is at 20%.
• Labor participation rate is at its lowest in over 36 years (62.7%). This matches 1978 lows and contributes to the 5.9% unemployment rate.
• Employment to population ratio is 59% vs 62% (6 years ago) and 64.2% in the year 2000.
• Out of the 248k jobs added in the latest report, 230k is actually from 55-69 age group.
• The prime working age population of 25-54 demographics actually lost 10k jobs in the latest report
  • Their employment ratio is at 1982 levels.
• Since December 2007, the 55-69 age group has gained 5.5 million jobs vs loss of 2.04 million jobs for the core 25-54 demographics.
• The type of jobs added in the latest report are restaurants and supermarket jobs which are lower wage and more often than not, not a full time position.
• U-6 measure of labor underutilization is at 11.8%. This measures the total unemployed plus all “marginally attached workers” plus total employed part time for economic reasons (underemployed)
  • While this number is lower than what it was during the depth of recession, it is still at an elevated rate and have not recovered to its pre-recession rate.

We discussed why the appreciation of dollar and concern of global growth will hold inflation rate to below their 2% target but there is another factor in determining inflation. The last puzzle piece which drives inflation is wage growth. Unfortunately we have not seen wage growth manifested as of yet despite the recovery in stock market. According to Mohamed El-Erian, this is partially due to the lack of “holistic policy response because of polarization of congress” in not taking up measures to increase the minimum wage.

I believe that in addition to the paralysis in Washington, this is part of the “new normal” where the jobs being added (as shown in the latest jobs report) are low paying jobs in retail sector which might not even be a full time position. This phenomenon suppresses wage growth as people are force to take up positions with little to no future increase in salary.

Lastly, we are also seeing an increase in productivity which prevent companies from hiring as they can now squeeze more out of their existing workforce. This means less opening for higher salary jobs and the unemployed are stuck doing retail jobs at lower wage which will also diminish their skillsets over time.

Overall, there are still reasons for the Fed to be concerned about the US economy which makes their dovish minute today a lot more sense.

Happy trading!

Calm Before The Storm

Monday, September 15th 2014

I’m back (again) after a second round of disappearance this week. I am still trying to formulate the topics to write when I do not daytrade. Yes I have been slacking but frankly, I just have not seen any good trades so I manually veto-ed the trade from CWB EA!

This week is going to be quite a roller coaster ride and I want to at least put up my thoughts out there before we dive head on to the hurricane.
(Side note: Talk about hurricanes… See chart above. Holy shit BOJ balance sheet)

News Alert

Holy Batman Central Banks week!! We have 3 Central Bank rate decision and 1 Minute release from RBA. Not to mention Scottish Independence Vote on Thursday.

Let’s go through them one by one, shall we?

• Wednesday, September 17th
  • Bank of England rate decision and MPC Asset Purchase votes
    • Currencies in play: All GBP crosses. Going to focus on GBP/USD, GBP/CHF, and GBP/AUD
  • Federal Reserve rate decision, economic projections, and statements
    • Currencies in play: All USD crosses. Going to focus on USD/JPY, EUR/USD, and USD/CHF
• Thursday, September 18th
  • Swiss National Bank LIBOR decision and Monetary Policy assessment
    • Currencies in play: All CHF crosses. Going to focus on EUR/CHF and USD/CHF
  • Scottish Independence Referendum Vote
    • Currencies in play: All GBP crosses.

A couple potential Black Swan event this week:

• If SNB did not institute some sort of negative interest rate or a very strong language indicating their resolve to defend the 1.20 EUR/CHF peg level, expect EUR/CHF to weaken.
  • I would be really careful in trading this pair because of reasons I have mentioned previously. Yes, the SNB needs to keep their credibility by absolutely defending the peg but there is no guarantee here. I would love to tell you just to put massive long order at 1.20 but without any strong language or further push of interest rate to negative territory, I am envisioning bad things could happen with this pair.
• If Scottish voters decided to split up from the UK, expect GBP to be pummeled across the board. 
  • As of today, the polls are too close to call. It  is anybody’s game at this rate.
  • While I do not live in the UK or Scotland, nor I have any connection there (aside from having visited England before and desperately want to visit Edinburgh), I think there might be some major ramification with Scotland leaving England with all the logistics they need to do (e.g. splitting up debts, troops, setting up embassies, getting their own currency, etc). I understand there are other historical factors that I am not included in here and I am by no means advocating for one vote or another.

Happy Trading!

P.S. Watch this for John Oliver’s funny take on the Scotland Referendum vote

The Tale of Mario “Slasher” Draghi

Thursday, September 4th 2014

What can I say, Super Mario Draghi pulled no punches today and ECB cut the Eurozone interest rate to 0.05% from 0.15%. Eurodollar fell sharply. He even announced the QE program similar to what Fed is doing here in the US. Let’s go over our trade first and then I want to give some commentary regarding this rate decision.

Trade #1 – Short EUR/USD at 1.30923

Eurodollar breached pivot downwards around 6am ET but knowing the ECB rate decision is around the corner, I decided to be cautious and place a short trade below the trading level so it will only get picked up when there’s momentum downward. This is always a good strategy when there’s a big news coming up and you are unsure where the market will head next. I’ve been trading this way for major decision such as central banks monetary announcement, US Nonfarm payroll, or GDP numbers.

That said, Euro was absolutely clobbered across the board after the rate cut. Went down a cool 200 something pips during the day. Closed my trade for about +145 pips profits as shown with the green check mark.

The “Japan-ization” of Eurozone

This rate decision by ECB is clearly a surprise and the market did not expect such cut, however, it is always important to keep in mind that central banks need to keep their credibility at all cost. This move by ECB, while small, signaled intent that their 2% inflation target is real and they will do whatever it takes to achieve such inflation target. Draghi mentioned:

“The newly decided measures, together with the targeted longer-term refinancing operations which will be conducted in two weeks, will have a sizeable impact on our balance sheet“

which is clearly a direct jab to market participants who are doubting his resolve to grow the balance sheet. Unfortunately, despite their talks, Eurozone inflation has actually been going down since 2012 as shown by chart below (courtesy of NYT):

In addition to the rate cut, Draghi also announced that starting next month, the ECB will begin buying asset backed securities such as packaged home and business loans, credit card debt, and covered bonds. This, for all intents and purposes, is similar but not quite to the extent of QE program being operated in the US by the Federal Reserve.

Some economists were praising Draghi for the bold move by the ECB but I wondered if these measures are too little too late. Will Eurozone get trapped into deflationary cycle like Japan? Only time will tell. Draghi today also acknowledged that the recovery is slowing but unfortunately their interest rate is at its “lower bound” thus any further easing has to come from a stronger asset buying program (QE) to hopefully inject money into the economy.

In my opinion, unless the very structure of Eurozone is changed where they have a singular fiscal and monetary policy similar to the United States, the ECB policies will be fairly impotent. Yes they will keep pushing the rate lower but they are pretty much at the bottom here and now they have to embark on rounds of QE but how effective will it be? They are not purchasing each nations government debt like what Fed is doing so I’m not sure how their QE scheme will work in pumping new money into the market. It is mind boggling how the ECB has been very accommodative in its monetary policy but the fiscal policies by its member states are practically dulling its effect. France is not helping with their sky high tax rate and Germany’s stubbornness with their austerity is laughable.

So what will be the impact of this rate cut? I am looking at EUR/CHF because as we remember, SNB pegged the Swiss Franc to the Euro at the rate of 1.20 in 2011 and today’s rate cut means EUR/CHF is now inching ever closer to that pegged level. How will SNB keep its credibility when the cost of pegging CHF is getting more expensive? Will they let the floor go? Or will they accept an even higher inflation of housing, equities, and other assets in Switzerland?

Then how about the Japanese Yen? The BOJ has been winning the race to the bottom in terms of interest rate. They have kept the 0.10% since 2010 but now that ECB has cut its rate, they are not the lowest rate in town anymore. Will BOJ look to cut their rate? Look at USD/JPY and maybe AUD/JPY or NZD/JPY for this.