The Advisor Weblog

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• Major crosses forecast
• Just sell the greenback
• Hourly perspective for US session
• Intervention erased
• Best pair to trade now: EUR/USD
• Majors’ sentiment for today
• Starting the day

Major crosses forecast Posted: 01 Oct 2010 08:02 AM PDT Fxstreet.com has launched a a new Experts Forecast Currency Poll for major crosses, with several analyst prospects for each one. Could be interesting to follow, here is the one for EUR/USD: http://www.fxstreet.com/technical/forex-forecasts/experts-forecast-currencies-poll/2010-10-01.html

Just sell the greenback Posted: 01 Oct 2010 07:16 AM PDT Data is bad? US will need more QE, dollar is no good. Data is good? OK then risk appetite, let’s sell the dollar a bit more!. Seriously, and as I always say, fundamentals can’t change a trend when we have one. Don’t fight it, just follow it. Wait for deeps to get better entry points, and that’s it. Don’t get excessively confident: corrections do happen sometimes.

Hourly perspective for US session Posted: 01 Oct 2010 06:32 AM PDT Here is the hourly perspective for the US session: http://www.fxstreet.com/technical/analysis-reports/currency-majors-technical-perspective/2010-10-01.v02.html

Intervention erased Posted: 01 Oct 2010 04:07 AM PDT As comment yesterday during the  GDP Live Coverage, is never a good idea try to catch a falling knife. Or in this case, try to find a bottom to this cross, or buy just because BOJ will intervene. USD/JPY has erased all post intervention gains, and continues heading south. This is the COT chart, for the past 3 years: Green line, above blue, is just telling me that the large traders, the “smart money”, is long in yen. A good reason not to go against it. Readings support here, further yen strength. At least, till Tuesday: BOJ will be announcing Japan monetary policy then. Maybe, just Maybe, they will do something interesting to weaken yen. In the mid time, COT is also showing as that we are far from extreme readings, suggesting a bottom has not been seen yet. All the bulls that are actually praying for BOJ intervention, have probably placed stops just under that 82.90 low. Expect a selloff in the cross, it those stops start to being hit. 82.50 and 82.10 are downside targets for today.

Best pair to trade now: EUR/USD Posted: 01 Oct 2010 03:41 AM PDT Here is my first choice for today: http://www.fxstreet.com/technical/forex-strategy/the-best-pair-to-trade-now/2010-10-01.html

Majors’ sentiment for today Posted: 01 Oct 2010 02:59 AM PDT Here is the majors’ sentiment for today: Eur/Usd: Bullish Gbp/Usd: Bullish Usd/Chf: Slightly Bearish Usd/Jpy: Bearish Eur/Gbp: Slightly Bearish Eur/Jpy: Bullish Gbp/Jpy: Bullish

Starting the day Posted: 01 Oct 2010 02:51 AM PDT Hi all and welcome back! Past Thursday’s corrective movements where just enough to give further strength to the trend, and Euro is testing 1.3760 right now, while Aussie and Yen are a couple of pips away from the multi-year highs set past month; early data has been disappointing in Europe, but who cares?. Gold is testing yesterday’s all time high near $ 1316/oz, oil is above $ 80 a barrel, and the world continues getting rid of their greenbacks. I was asked early this week why Euro is rising so strongly,  and my opinion is that, besides the well-known safe havens, there is nowhere else to turn to. Euro as currency is absorbing the rest of the economic problems: while FED left doors open for QE 2 months ago, BOE’s member Posen said past Tuesday that the UK might follow suit. Japan will discuss next week how to ease their monetary policy and is determined to (if not likely) weaken their currency. The Australian dollar could be the other preferred buy these days, yet market talk is already crowded with how soon the RBA will come out to halt the rally. As a consequence, Euro is the only currency with a central bank allowing it to float freely, not showing any signs of halting the run. Here is the full article if you want to read it: http://www.fxstreet.com/fundamental/analysis-reports/euro-bullish-despite-eurozone-news/2010-09-30.html Anyway! Will tke a look at technicals; here is the link for today's calendar: http://www.fxstreet.com/fundamental/economic-calendar/ Have a great day!

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Never Trust Experts

Science at some level contains essentials truths that are interesting and useful, a dominant alternative to ignorance and superstition. At the cutting edge, however, it's all about seeing what you believe, so it's mainly a trick of knowing what to prove, because a clever person can prove anything.

In an article on the Carry Trade, Menkhoff, Sarno, Scheling, and Schrimpf say they explain the positive returns to strategy via a 'risk premium'. This is how it is supposed to be, any identifiable return premium should be explainable in terms of risk alone.

So, here's a little throw-away line about prior work on volatility:

we investigate the empirical 2 performance of another risk factor: innovations in global FX volatility. This factor is a proxy for changes in market volatility suggested by the ICAPM theory, and is the analogue of the aggregate volatility risk factor used by Ang, Hodrick, Xing, and Zhang (2006) for pricing the cross section of stock returns. We show that global FX volatility is indeed a pervasive risk factor in the cross-section of FX excess returns.

OK, what they are saying is "There is no puzzle. It's all explainable in the standard framework. We use the risk factor 'innovations in volatility', which has been shown a relevant pricing factor back in 2006". The problem is that the paper referenced showed that high volatility innovation is correlated with lower returns. Further, higher volatility ex-innovation is correlated with lower returns. Indeed, the 'volatility innovations' ruse is clearly an attempt to torture the data to tell it what the authors wanted. Here, the risk premium actually makes sense (if you believe their results, and I'm skeptical they are robust as the carry trade did well in years like 2001-2002, and poorly in 1997-2000; there isn't as much data as you might think; eyeball below and see if it looks like returns are positively correlated with 'good times'). If volatility innovation is a priced risk factor, it doesn't make sense in general because in other markets volatility and things correlated with it are inversely related to returns.



So, financial economists appear to have shown again that some asset pricing pattern can totally be explained via some correlation with some new metric of risk that is strangely parochial to that specific asset class (that's not how it should work). They all know that returns are totally explained via risk premiums, as defined as covariances with proxies of their marginal utility. So, when convoluted tendentious drivel like this shows up again and again, it is considered serious research. I say, it's only interesting to academics if you believe the risk-premium theory (99%+ economists).

This search for the evanescent risk premium that appears as an ephemeral ghost, yet is omnipresent and very important, is one of the myths of our age. I've got better things to do.