Thursday, September 30, 2010

The Advisor Weblog

The Advisor Weblog

Gold falls, triggers a dollar rally

Posted: 30 Sep 2010 07:03 AM PDT

Better than expected data in the US sent gold strongly down in the past hour, favoring a dollar spike across the board. Pound is losing bigger testing 1.5730 support zone, still market is not ready to start buying greenbacks; don’t panic. Not yet.

Here is the hourly perspective updated for the US session:

http://www.fxstreet.com/technical/analysis-reports/currency-majors-technical-perspective/2010-09-30.v02.html

Live coverage

Posted: 30 Sep 2010 04:55 AM PDT

In about 20 minutes or so, I will start  a Live coverage, of USD GDP q/q release. You can join me at Fxstreet.com home page.

See you there

Best pair to trade now: EUR/USD

Posted: 30 Sep 2010 04:03 AM PDT

Gold and Oil

Posted: 30 Sep 2010 03:31 AM PDT

Gold reached a fresh , all time high, another yes, at $ 1315/oz, while oil is around $ 78.50 a barrel, 7 weeks high. That of course is helping smash the dollar across the board.

As gold continues rising, is not Australian dollar the most benefit, but Swiss Franc: USD/CHF  approached to 0.9700, with it’s all time low around 0.9640. Keep an eye on Swissy today.

Majors’ sentiment for today

Posted: 30 Sep 2010 03:18 AM PDT

Here is the majors’ sentiment for today:

Eur/Usd: Bullish

Gbp/Usd: Bullish

Usd/Chf: Bearish

Usd/Jpy: Bearish

Eur/Gbp: Slightly Bullish

Eur/Jpy: Slightly Bearish

Gbp/Jpy: Neutral

Starting the day

Posted: 30 Sep 2010 03:15 AM PDT

Hi everyone and welcome back! Almost boring to repeat dollar continues to be under pressure right? Despite the extreme readings, and the rallies with almost no corrections, nothing says from a technical point of view, that dollar will attempt at least a correction; Euro has run over 1000 pips straight, as well as Aussie; USD/JPY accumulates 10 days in a row to the downside erasing all intervention gains, while USD/CHF is just 100 pips away from its all time low. Again, not denying dollar weakness, just stating this is not too rational. Still, and I quote a great analyst from Australia, Mr Sean Lee, ” the market can remain irrational for much longer that you can remain solvent so if you don’t understand it, don’t fight it”.I wish sometimes my english was good enough to say those things by myself ;)

Anyway! is the best advice for these days; today is the last trading day of the month, and the close of the first half of the fiscal year in Japan. We usually see some profit taking and counter trend rallies, yet at this point, seems a bit too deary to recommend as an intraday trading strategy, right? Honestly, I will probably stay away of the market today. I will update my technical perspective as usual, but seems I will keep my fingers quite still today. I don’t understand market today, and I will take my own ( or better said, Sean’s) advice.

 Here is the link for today's calendar:

http://www.fxstreet.com/fundamental/economic-calendar/

Have a great day!
Posted by at 5:17 PM 0 comments

What is the Carry Trade?

I recently mentioned the Carry Trade, and it wasn't obvious what i was talking about, so here's a short description. The Carry Trade in currency markets is when you borrow in the currency with the low interest rate, and then invest that in the currency with the higher interest rate. If the exchange rate does not change, this generates a positive return. Uncovered Interest Rate Parity is a theory that connects current to future spot rates. This theory states that you have two ways of investing, which should be equal. First, you can invest in your home country at the riskless rate. So if the US interest rate is 5%, you can make a 5% return in one year, in USD. Alternatively, you can buy, say, Yen, invest at the yen interest rate (each currency has a different risk-free rate), and then convert back to USD when your riskless security matures. For this to be equal, you need something like:

rusd=ryen + Appreciation in Yen

Where rusd is the US interest rate, etc. So, if you make 5% in USD, an American investor should receive that same return in yen, via the interest rate in yen, plus the expected appreciation/depreciation in the yen against the dollar. If the interest rate in yen is 1%, this means one expects the yen to appreciate by 4%. When the foreign interest rate is higher than the US interest rate, risk-neutral and rational US investors should expect the foreign currency to depreciate against the dollar by the difference between the two interest rates. This way, investors are indifferent between borrowing at home and lending abroad, or the converse. This is known as the uncovered interest rate parity condition, and it is violated in the data except in the case of very high inflation currencies. In practice higher foreign interest rates predict that foreign currencies appreciate against the dollar, making investing in higher interest rate countries win-win: you get appreciation on your currency, and higher riskless interest rates while in that currency.

Now the rates of expected return via the two investment paths can differ according to risk, so academics have been trying to explain this pattern via 'risk'. So one can imagine, looking at the yen, or the dollar, or various European currencies in the 1970’s, etc., trying to tie each to some measure of a home currency’s risk factor: consumption, the stock market.

Like high returns to low volatility stocks, it is difficult, but not theoretically impossible, to make sense of the higher currency returns to high interest rate currencies. Robert Hodrick wrote a technical overview of the theory and evidence of currency markets in 1987. He summed up his findings in this paragraph:


We have found a rich set of empirical results... We do not yet have a model of expected returns that fits the data. International finance is no worse off in this respect than more traditional areas of finance.


Hodrick looked at CAPM models, latent variable models, conditional variance models, models that use expenditures on durables, or nondurables and services, Kalman filters. None outperformed the spot rate as a predictor of future currency prices. Hodrick leaves off with the idea that ‘simple models may not work well’.

For the next 20 years, and many hedge funds specialized in the ‘carry trade’, which was as simple as it was successful: lend capital to high interest rate currencies, enjoy the high riskless rates and currency appreciation on the spot rate; borrow capital at the low interest rate currency, and make money on the depreciation of this debt over time. In 2008 these strategies suffered significantly, but the net effect is still there is no clear relation between risk and return in currencies. Below is the total return to going long the Australian dollar (a high interest rate currency) short the Yen (a low interest rate currency), from 1990 to 2010. Note on average it makes money (about 1.5%).



Brunnermeier, Nagel and Pedersen (2008) noted that


Overall, we argue that our findings call for new theoretical macroeconomic models in which risk premia are affected by funding and liquidity constraints, not just shocks to productivity, output, or the utility function.


What they mean is that the carry trade continued to work 30 years after being identified by Farber and Fama, and it has continued as a puzzle because no reasonable risk factor can explain it.
Posted by at 5:43 AM 0 comments

Wednesday, September 29, 2010

The Advisor Weblog

The Advisor Weblog

Hourly perspective for US session

Posted: 29 Sep 2010 06:45 AM PDT

Not discussing the trend, but…

Posted: 29 Sep 2010 04:06 AM PDT

I’m not making this post to discuss or deny, Euro bullish trend. It’s just a number of facts that sooner or later, should weight on the common currency. We could get to 1.45, 1.50 or whatever level you can imagine before things change; however, would be good to be aware of this things, taking place in the European peripheral countries:

On Thursday, the Irish government will present plans for dealing with the Anglo-Irish bank; the state-owned bank, announced early this month, a stunning loss of €8.2bn loss in H1 2010. The Minister for Finance Brian Lenihan said also early this month, that the bank is to be spilt into a Funding Bank for deposits and an Asset Recovery Bank to recover loans. Let’s remind that just yesterday, the Irish bond yields surged higher, rising to a record 6.72% on 10-year debt.

Portugal, one of the most fragile countries in the euro zone, is not far away from that situation: Minister of Finance Fernando Teixeira dos Santos’ said that the country must stick to its deficit reduction targets for 2010, and this will not be possible without additional tax revenues. Taxes hit consumption, and so, growth. Portugal has so far failed to rein in the central government deficit; and of course bond yields keep widening.

 Meanwhile today, Spain faces travel chaos and mass protests in its first general strike in eight years amid anger over austerity measures imposed by the Spanish government; those measures, include lowering civil servants pay and freezing pensions.

Yet the Euro holds above 1.3600, 5-month high, and heading higher. I have a couple of ideas why this is happening, still talking to much about euro zone woes right now, seems almost stupid. Market won’t care about this; QE is the focus, and nothing else ;)

 

 

Best pair to trade now: EUR/USD

Posted: 29 Sep 2010 03:00 AM PDT

Majors’ sentiment for today

Posted: 29 Sep 2010 01:38 AM PDT

Here is the majors’ sentiment for today:

Eur/Usd: Bullish

Gbp/Usd: Slightly Bearish

Usd/Chf: Neutral

Usd/Jpy: Bearish

Eur/Gbp: Bullish

Eur/Jpy: Slightly Bearish

Gbp/Jpy: Bearish

 

Starting the day

Posted: 29 Sep 2010 01:10 AM PDT

Hi everyone and welcome back! Following a consolidate stage during Asian session, Europe opening is sending dollar to fresh lows against major rivals, as the trend, and the market sentiment, remain intact. Dollar is bearish, and that’s it. Despite whatever is going on in other major economies, at this point investors need no reason to sell dollars; trying to find a reversal point in this rallies, even against the yen, hoping for BOJ intervention, is almost suicide. Waiting for pullbacks to get better entry points seems to be the wisest idea of short term trading at this point. For the past couple of weeks, corrective movements against this trend had been quite limited, so I do believe that a more interesting corrective movement is not far away. Anyway, as said, will be just corrective, as trend is pretty much clear at this point.

We have the first round of data, coming in a few minutes, in the UK, so here is the link for today’s calendar:

http://www.fxstreet.com/fundamental/economic-calendar/

Have a great day!
Posted by at 6:28 PM 0 comments
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