Recap for Week Ending 6/29

Well, the market brought it on, and I won! Last week, my portfolio chipped away 5.63%; this week, it grew by 56.25%. I've still got my market mojo, haha. The spot forex market this week was a traders' dream. It didn't matter what commodities or currencies you traded, or whether you were long or short. As long as you were there to accommodate the changing taste of Mr. Market, you made money.

Risk aversion caused a mass unwinding of carry trades from Monday to the close of the New York session on Wednesday afternoon. The yen strengthened against ALL other currencies. In fact, all low-yielding currencies strengthened against all high-yielding. A lesser-known public watchdog had issued an official statement warning the public of a reversal of the apparently excessive weakness of the yen. Everyone took that as cue to book profit on their short JPY/crosses positions and ran for the exit.

Since I had been short CHF/JPY at an average price of 100.41, and hanging on to the position meant I had to forgo about 1-2 PIP's a day in interest payment, I didn't feel comfortable holding it for too long. So when CHF/JPY went from 100.87 to 100.16, (in less than 12 hours), I immediately realized my profit and went short JPY by going long AUD/JPY, CAD/JPY, EUR/JPY, and GBP/JPY. I shorted NZD against USD and also managed to squeeze out a modest profit. Of course, if I had hung on to CHF/JPY and taken profit @ 99.73, the profit would have been more rewarding (in terms of costs and benefits).

Anyway, during the London session Wednesday night and/or the New York session Thursday morning, something incredible happened. News, that U.K. economy isn't growing as slowly as market participants had thought, hit the wire. The global stock markets rallied. Crude oil futures spiked. Thus, the reversal of a reversal began. Risk-averse traders became risk-loving. Gold, which had gone down from 650 to 640 USD an oz., found its way back to 645 and now @ 648.35. The strength of the JPY turned into weakness and the yen-bearish momentum continues. And here we are, exactly where we left off last week. Well, almost exactly.

The only way a trader could have lost money this week was if he was USD-bullish and he had believed that the Fed would raise interest rate yesterday. The Greenback lost ground against most currencies this week, from the Aussie, to the Loonie, to the Euro, to the Cable, to the Yen, to the Turkish Lira! I myself would have lost A LOT on long USD/CAD, if it weren't for the profit booked on rebound from 1.0527 to 1.0614. Again, if I knew the pair would retrace all of its downward move completely, and then some, I would not have closed that f***ing profitable position so soon.

But like George Soros wrote in one of his books, "a high degree of success is often the precursor to a severe setback." I have to be careful.

Recap for Week Ending 6/22

For the first time in a couple months, I closed in the red this week. I had been in the black (consistently, I might add) up until yesterday's morning. Nevertheless, due to an inflated assessment of my own market mojo, I became overly self-confident, broke all my rules, and entered into positions that are outright against the market.

The position with the largest running loss right now has to be the short CHF/JPY position. My initial sell order was executed @ 99.90, last night during the London session, right after USD/JPY broke its 124.00 resistance. As the up-trend continued to strengthen, I kept selling more, at 100.10, 100.35 and 100.70. My average price now stands at 100.41.

Because averaging up required additional capital, my cash reserve dwindled; now it's standing at a measly 7% of my total portfolio value (as opposed to 51% last weekend). What's worse is, since short CHF/JPY is an interest-negative trade, my cash reserve is being depleted as we speak. My interest-positive positions are simply not large enough to offset that.

I had known about the SNB's imminent rate hikes, but I did not believe the broad CHF rally had such persistent strength. While there were talks of Japanese investment houses buying U.S. and U.K. assets, I totally ignored them. "Market markers were attempting to exacerbate the Yen-bearish sentiment," I thought. It never occurred to me that as the JPY became the dominant funding currency (before yesterday, carry traders had a choice between the CHF and the JPY), market participants would unwind their CHF-funded carry trades and at the same time increase their JPY-funded carry trades.

Now that I'm underwater, I think I'll stay underwater for a while. There's no use turning back now. If CHF/JPY is to be as strong as the other JPY crosses, it would have to retrace some of its upward movements. If there is a retracement, I will get a chance at break-even. If there is no retracement, then the rally will prove to be short-lived and the eventual downward move will be more violent. There'll be a major event that causes everyone to want to run for the exit. The question is when.


I'm not afraid that CHF/JPY will hit 101.00, no. To take me out, the market has to move another 50-75 PIP's against me. In other words, the pair would have to push past 101.00 and test 101.50, in order for me to get a margin call. But I'm ready, financially and emotionally. Bring it on, Mr. Market.

Sometimes It Pays To Have Common Sense

There is an article in the UK Daily Telegraph today headlined "Japanese grannies trounce Kiwi bank." It recounts the latest intervention by the Reserve Bank of New Zealand in the foreign exchange markets. Due to the high interest rate differential between the NZD and JPY, Japanese run-of-the-mill speculators have found it profitable to borrow the yen to fund purchases of the kiwi.

Who wouldn't when they can borrow the yen at .08% per annum, turn around, and lend it at 7.80% in New Zealand dollars? (See JPY ask interest and NZD bid interest below.) The difference is a return on borrowed capital.


Anyhow, as people bid up the kiwi in droves, the NZD/JPY exchange rate appreciates. This makes New Zealand's exports even less competitive. Excess capital inflows also accelerates inflation, which means that the central bank must raise its interest rate further to stabilize prices. Or, it can attempt to offset some inflows with outflows by selling its own currency in the forex markets.

So far, intervention by the RBNZ has proved to be difficult, if not ineffective. It's a small bank; it does not have enough cash reserves to fight off "speculators" on the hunt for high yield.

After all, capital markets are numbers' games. No matter who or what you are, you have to be on the side with the largest number of people, or the highest amount of capital, in order to make a difference. If you have nil for capital and you go against the market, tough luck. So what if you're a central bank? Whereas if you have a lot of capital, as the People's Bank of China does, you can pretty much make the market lean towards you.

During the last 3, 4 weeks, I have not materially participated in carry trades, largely because of fear and largely because I am living with the ghost of rationality. Coming from the academia, I always have this illusion of being smarter than the average trader. Hey, I have a working knowledge of all these arcane theories, so I have got to be, right? Wrong!

After AUD/JPY traded above 100, and USD/JPY, above 122, I basically stayed off them. "They're overvalued," I said. Little did I know, those two JPY crosses kept propping up and I've missed out on practically ALL appreciation and associated carry interest. Why? For no other reason than that I lack common sense.

Now it's too late to do anything about it. I can't really enter into carry trades right now because they are too popular. Everyone's talking about them. (Here's another article within the last 24 hours about carry trades.) This self-fulfilling cycle is about to become self-defeated. The present time is similar to the beginning of 2001, before the stock market bubble busted. On the other hand, I can't enter into counter-carry trades for the sake of my doom forecast, either. The consequences of my being wrong are too great: I would lose my trading capital in two ways 1) through payments of carry interest, and 2) through further strengthening of JPY crosses.

Great, now I've got mental paralysis from too much analyzing; I can't act. This is why sometimes it pays to have common sense. If I had common sense, I would know what the common trader is thinking and act on that. I would be much more successful than I am. No wonder successful traders have no Ph.D.'s, and no Ph.D.'s are successful traders.

Recap for Week Ending 6/15

I over-traded this week. Even though my gains overwhelmed my losses, some of the time I spent on trading could have been better utilized elsewhere.

Went long AUD/JPY @ 102.90, one hour into the Tokyo open, Thursday evening. But due to the size of the position and the then-developing weakness of the AUD, I decided to close it a couple of hours later with a modest gain. On Friday, the AUD received a double dose of good news when oil traded above 71 USD and the BoJ meeting ended with a unanimous verdict to keep rates on hold at 0.5%. Needless to say, I missed all of the AUD/JPY rally to 103.90.

Went long AUD/USD @ .8375, after my AUD/JPY liquidation, Thursday evening. AUD/USD TP order got executed @ .8400O, on Friday, as soon as U.S. core inflation figures came out lower than expected, and oil broke resistance at 70 USD. Booked a 25-PIP profit.

Went long CHF/JPY @ 99.14, early Friday, since the Swissie wasn't testing new highs against the Yen as other the majors were. Booked a 28-PIP profit @ 99.42, when BoJ Fukui's dovish comments (following the decision) hit the wire.

Went long EUR/AUD @ 1.5845, during the London session, early Wednesday, based on an extreme -DI reading on the daily chart. Manually closed the position @ 1.5845, 8 hours later, realizing a loss of 31 PIPs. Little did I know, the pair traded higher thereafter. The signal was right and I had been somewhat impatient in demanding results.

Went long EUR/CAD @ 1.4225, during the London session, early Wednesday, based on ADX and other oversold signals on the daily chart. At the end of the London session, Friday morning, my limit long order of equal size was executed @ 1.4160. Later, at the end of New York session, when the EUR/CAD had spiked for no apparent reason, I adjusted my SL orders upward. Both orders got executed @ 1.4275 and I was a happy camper. Not too happy when it continued to go up, though. But if the EUR/CAD is to retrace its downward trend since the mid-March, first it would have to dip lightly. 1.4240 seems like a good entry point to rebuild my long position.

Went long USD/CAD after some personal profit taking. Added to my long position on two separate occasions. Average price now stands @ 1.0685. Placed a limit buy order @ 1.0608 with one-half of my total cash reserves. I've got no intention to undo this setup any time soon. The Canadian dollar is overpriced, fundamentally and technically. M&A inflows have been cited as cause for the recent rise in the CAD vis-à-vis the USD (and the EUR). Sizable bids for the CAD cannot continue unabated. In fact, the Canadian government is expected to freeze foreign direct investment. What's more, already, Canadian exporters are closing their plants left and right because of the strong Loonie. It's only a matter of time before economic reports confirm an actual slowdown in the growth of the Canadian economy.

Went short XAU/USD @ 651, during the Tokyo-London overlap, Thursday night, for fear of missing out. This was, of course, hours before the U.S. core inflation figures came out. My running loss now stands at 555 PIPs. Daily ADX still looks bearish, although -DI seems weakening; both are hovering at mid 20’s. Now I have two options: 1) cut my losses now, or 2) average down. I think I will choose the third option: diversify away from the U.S. dollar.

The question is, into what commodity or currency?

Recap for Week Ending 6/8

This week was quite interesting. I started out with a sizable paper loss on USD/CAD. On Monday, the pair lost 50 more PIPs from the close last weekend. For fear that it might decline further, I manually closed out 1/3 of my long USD/CAD position @ 1.0560 and simultaneously went long CAD/JPY @ 115.45 with tight stop. When CAD/JPY had advanced past my average price, I adjusted my stop upward. Stop got hit @ 115.58 and a 15-PIP profit was booked.

Meanwhile, USD/CAD bearish momentum stalled. The pair went into a trading range between 1.0547 and 1.0640. It wasn't until yesterday morning, Thursday morning, that it broke resistance at 1.0650. When news that the Canadian economy only added 9.3k jobs in May (as opposed to the ex ante market consensus of 15k) came out, I took advantage of it and closed out my position @ 1.0684, with a modest profit. Not wanting to miss out on a possible bullish formation, I placed in "incremental" limit buy orders and went to sleep.

While I was snoozin', Canadian-positive news that came out later today (and/or profit-taking) drove it back to sub-1.0650 levels. My average price now stands at 1.0624, as opposed to 1.0669 last weekend. Hourly ADX is looking neutral right now. "USD/CAD will eventually need to close above 1.0712 to confirm a broader correction of the long-term downtrend," pundits are saying. Whatever. My USD/CAD orders are placed in such a way that I stand to profit regardless of the outcome.

XAU/USD also retreated this week. I had managed to sell more gold @ 669.19 on Wednesday, before the big drop. However, because I had adjusted my stops downward as an insurance policy against an immediate reversal, a bounce to 660.95 took out all of my position, automatically booking a small profit, relatively speaking.

Based on 30-min ADX, I rebuilt a smaller short position @ 660.20. This turned out to be a correct signal. Again, because I did not want to give back all of my profit, I adjusted my stop downward and it got hit @ 657.20. Gold trended down, however, (due to a broad depression in metals and oil's prices), forcing me to miss out on over 1000 PIPs.

Now I'm sitting on the sidelines, wondering if I should be selling XAU/USD again next week. The daily chart clearly indicates a successful bearish trend formation. ADX is in the low 20's. -DI has freshly crossed +DI. Last year, at this time, gold was also in decline. The 52-week low
@ 541.50 USD an oz. was reached on June 13th, as the chart indicates. So yeah, there's room for a 11,000-PIP profit.

Fundamentally, though, global economies are still growing at an alarming rate. While the U.S. and other large economies have slowed down quite a bit in the past few quarters, inflation is still a forced to be reckoned with. The high demand for oil is not going away, with China and India growing @ 10+% annually. If policy makers insist on keeping liquidity high, or do not have the balls to raise interest rates to tame inflation, wealth managers will once again turn to gold for storage, keeping gold prices above 500, or even pushing it past 700. With a 50:1 leverage ratio, a 1% rise in the price of gold translates into a 50% loss on a short trade; 2% rise, 100% loss. I do not want to lose 20% on any trade, let alone 50% or 100%.

Thus, the question is: do I trust policy makers to make the right decision? The Bank of England voted to keep its central bank at 5.5% yesterday. Will the Fed do the same on June 28? I am torn.

Well, if XAU/USD bounces past 655, I'll think about it.

Recap for Week Ending 6/1

Oil and gold rallied later this week. Not surprisingly, the U.S. dollar strengthened against most of the majors but tanked against the commodity currencies (AUD, CAD and NZD).

I made a couple of blunders: After my stop loss on AUD/JPY was triggered and the currency pair had started to show signs of recovery, I failed to go long. I mistook a temporary profit-taking for a dead-cat bounce. Instead of following the reinforced trend, I stayed out of it and patiently looked for a support retest that never happened. Missed out on a gain of 200+ PIPs and associated carry interest.

In addition, I insisted on adding to my long USD/CAD position, going against the market’s bearish bias toward the pair. A consulting firm had issued a sell USD/CAD recommendation but I disregarded that. I still do; this part is no mistake. If consulting firms were better than traders at market-timing, they would be timing the market for themselves, not for traders.

At any rate, the mistake here is that I completely ignored the signals. I bought more at two separate instances of MACD crossing when I should have sold. In fact, I was not even aware of the crossings as they occurred because I was too busy calculating the perfect entry price. I thought I was so invincible that I could wish a reversal into existence, that momentum did not matter, and I that I could violate the golden rules and still come out ahead. I let my ego run the show. I should never forget that this is a numbers' game. As in John Maynard Keynes' "beauty contest," majority rules here.