Trading View Update

Real-time AmpGFX – Trading View, order update (Fri 2/9/2018 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