Short NZD/USD ( from 5-Feb to 12-Feb)
Real-time AmpGFX – sold to square USD longs and AUD/NZD (Mon 2/12/2018 9:03 AM MT)
Bought half unit NZD at 0.7239
Sold half unit USD/CAD at 1.2606
Bought half unit EUR/USD at 1.2262
Sold one unit AUD/NZD at 1.0810
Comment
I have closed my long USD positions and my long AUD/NZD position. I am square apart from the bitcoin ETN (COINXBE).
I wanted to return to square; after an erratic day of trading on Friday, I think it is time to retest my views.
An initial concern that comes to mind is that equity markets may start to find their feet, and this has not been good for the USD.
Partisan politics in the US has led to a big blowup in the budget, and will limit its capacity to attempt to narrow it.
The chances of any bipartisan efforts to reduce government spending succeeding in the US under a Trump presidency are very slim.
There is an argument that the weaker dollar theme could be propelled by budget risks.
Trump is supposed to be announcing budget cuts. If these fall flat and acrimony and blame games start in Congress, it will not be a good look.
A strengthening US economy and rising inflation expectations, raising US yields should tend to support the USD, but it is not clear that this will be a deciding force.
We will be looking at selling US bonds again as one of the best ways of trading this theme
AUD/NZD appears in a range and is not compelling at the moment. RBA was more successful in dampening rate hike expectations, NZ retail sales data were strong, there is a lot of political machinations in both countries, housing markets are weaker, China developments are murky. AUD is curiously trading as the more risk-sensitive currency.
XBT is working against resistance at the top of the gap after Thanksgiving last year (9022); since its low in Feb it has been making higher highs and higher lows. I think it looks constructive.
Positions
Long half unit COINXBE at 345.00
Real-time AmpGFX – Trading View, order update (Friday, February 09, 2018 4:24 PM MT)
Friday would have been a good day to do nothing and go skiing.
Through the morning USA session, you could see broadening contagion in the equity market selloff to emerging market and high yield bond markets. And increasing dollar funding pressure. On many risk measures, it appeared that broader risk contagion would unfold.
To date, the fallout in equity market correction this week has been relatively modest to currencies or bond markets (where I have positions). I have been positioned for some fallout to the USD, while attempting to hold a short US Treasury bond position, but wary that bond yields could fall if the equity market rout extended much further.
The fall in equities had accelerated into the close in recent sessions, so I thought we were shaping up for the same result on Friday. With the increasing influence of algo trading and index investing in ETFs, my concern was that we could see a surprisingly weak close to the week that left the market very nervous and spreading more than it has to date to FX and bond markets.
In the event, equities bounced sharply in afternoon trading and closed with a rising spurt.
It is far from clear that the market is out of the woods. Indeed there are reasons to expect a more prolonged period of market volatility. Even if this does not drive equities net lower, we still see risk biased towards a recovery in the USD, more than we have seen to date.
Investors are likely to remain more wary of late-cycle economic risks of inflation, less QE, and faster central bank policy tightening. It may also be the case that the market is becoming more nervous about the expected higher net supply of US Treasury bonds from ongoing fiscal expansion, just as central banks are slowing purchases.
There may still be some systemic contagion risk that flows from the failure of inverse volatility investment strategies. And other investments set up to enhance yield via leveraged investment. The sudden rise in VIX serves as a warning to these higher risk strategies that had become more popular in the preceding low vol market.
If the USD fall had been related to low vol higher risk investment in global assets chasing capital gain and yield enhancement, then a period of prolonged circumspection could see a further unwind in the USD decline.
As such, I did not rush to close long USD positions in the second half of the day, and will see how they trade early next week.
My first move on Friday morning was to close long USD positions. This in part reflects a shift in my attitude towards protecting profits. Retracements can be large into end week, and US equity futures were trading firmer into the market open.
I then resold EUR and NZD, and then added a short CAD position as the morning equity session turned sour. I kept these positions because my bias is to see dollar strength even if equities start recover, but remain more volatile. This reflects a view that more volatile markets may make the market look more at the rise in US yields that have occurred in recent months, and be more cautious selling or borrowing in USD to invest in higher-risk global investments.
However, price action towards a stronger USD is still muted, and this worries me that holding long USD positions in a rebounding equity market may not work.
In the end, I have been caught up in an end of week retracement in equities and the USD, albeit because I resold USD near the lows on the day.
My AUD/NZD long has been frustrating. It is interesting that the AUD has been much more reactive to equity market correction than the NZD. As such, AUD/NZD has traded lower in bouts of equity market weakness. I can’t really explain why AUD has been more risk-sensitive than NZD.
My confidence in the AUD/NZD position is fading. I have considered exiting it, but it has so far held near recent lows, and I am watching it more closely. It may just be in a choppy range, so I will hold to see if there is an opportunity to exit on a possible recovery to the top of its range.
I am now square US bonds. This has been a very effective trade to start the year. I was holding the short position seeing a possibility of a further outsized rise in yields. However, I am not convinced these are great levels to be short bonds, and the risk is more evenly balanced. I closed this position in the midst of the morning equity market slide, fearing broader equity market contagion. The equity rally into the close is obviously a stabilizing influence for yields. However, the outlook for yields in the near term is now more mixed.
Positions
Long one unit AUD/NZD at 1.0797; s/l 1.0733; t/p 1.0988
Long half unit COINXBE at 345.00
Short half unit EUR at 1.2235; s/l 1.2367; t/p 1.2128
Short half unit NZD at 0.7249; s/l 0.7367; t/p 0.7078
Long half unit USD/CAD at 1.2625; s/l 1.2523; t/p 1.2848
Real-time AmpGFX – Sold EUR and NZD to re-open short positions (Fri 2/9/2018 10:16 AM MT)
Sold half unit EUR at 1.2235 and a half unit on NZD at 0.7249 to re-establish shorts covered this morning
This morning I thought we might see stable equity markets and some retracement of recent USD strength.
The performance of the equity market so far today has not been impressive, now I am seeing risk of an accelerating fall into the close for the week that would significantly undermine investor risk appetite further.
As such, I have re-established the earlier long USD positions. I intend to firm up my views and provide a more extensive comment later today.
Positions
Long one unit AUD/NZD at 1.0797; s/l 1.0733; t/p 1.0988
Short half unit TYH8 at 121-29+; s/l 121-22+
Long half unit COINXBE at 345.00
Short half unit EUR at 1.2335
Short half unit NZD at 0.7249
Real-time AmpGFX – Bought EUR and NZD to close short positions (Fri 2/9/2018 7:04 AM)
Bought half unit EUR at 1.2275 and half unit NZD at 0.7253
Comment
risk of some end week square up of recent short USD positions; locking in some profit and will reassess during the day.
Real-Time AmpGFX – Sold NZD/USD & orders changed (Fri 2/2/2018 11:30 AM MT)
Sold half unit of NZD at 0.7302
Comment
US yields continue to stick at higher levels, despite the weaker US and global equities.
So this could continue to see a dollar correction higher that so far has been relatively mild.
Rate spreads have moved further against a number of currencies, including the NZD.
The AUD/USD rate spreads are now negative from one to 10 years.
The charts above of AUD and NZD vs. their rate spreads include EM equities and EM bond spreads. To date, EM equities and bonds have been strong performers and help account for stronger EM currencies, and a weaker USD more generally including against the AUD and NZD.
There has at least been some correction in EM equities in the last few days, and EM bonds have also been weaker, just not as weak as US Treasuries. We may continue to see more volatility in global equities if US yields continue to trend higher.
NZ Q4 employment data is due next week. NZ job ads growth has slowed
The employment index from the ANZ business survey has fallen significantly since mid-year
Recent PMI manufacturing data was weak; although it is volatile and hard to read too much into one number
Moderating trend in PMI services
NZ building consents peaking
NZ data surprise index lowest in dollar block
RBNZ policy statement next week. After the recent low inflation outcome, if wages next week, remain subdued, it is doubtful that the statement will offer any upgrade to its rates outlook, which is very flat. It may express dissatisfaction with persistently low inflation.
The exchange rate has strengthened since the last policy meeting (9-Nov), although not all that much on a TWI basis. The RBNZ could sound less sanguine on the exchange rate this time.
Adian Orr doesn’t take the helm until the end of March, so it seems unlikely there will be much change in tone to this statement ahead of his arrival.
Positions
Short half unit TYH8 at 122.203125; s/l 121.09+(yield at around 2.77%) (lowered from 122-06+)
Short half EUR/USD at 1.2490; s/l 1.2533 (lowered from 1.2623); t/p 1.2128
Short half unit NZD/USD at 0.7302; s/l 7388; t/p 0.7208