Recap for Week Ending 8/31

Net Asset Value (nominal): +0.92%
Purchasing Power (real): +0.16%
Change in Contributed Capital: 0

What a week, what a week. I was a happy camper, longing and shorting GBP/JPY and generating unconscionable profits up until Thursday night. That was when I decided to play my little hedge: XAU/USD short and AUD/JPY long.

Fundamentally, this hedge makes sense. The Australian dollar is a commodity currency, and as such, it usually moves in line with gold. When risk appetite increases, the AUD and gold strengthen. When risk aversion dominates, the JPY and USD strengthen. In the mean time, carry interest is accrued. Granted AUD/JPY and XAU/USD don't correlate perfectly (i.e. there's friction, maybe lagging), most of the time the hedge works. We saw it in action two weeks ago when nearly all the central banks in the world were pumping cash into the financial markets to prevent a global meltdown. Anyway, the hedge was supposed to protect me from surprises arising from the Bush Administration's announcement and Ben Bernanke's speech Friday morning, while I was sleeping.

Three hours into the New York session, at 10 EST, Chairman Bernanke proclaimed that the Fed will not bail out "investors and lenders from the consequences of their financial decisions," as if to prevent a case of moral hazard. This innocent disclaimer sent a large wave of a JPY long orders into the cash market. Due to the preset 2% stop loss, I was flushed out of my sizable AUD/JPY long position, along with other Crosses/JPY long positions. On top of that, oil and gold prices did not budge. As a matter of fact, they actually went up slightly. WTF?!

But in the next paragraph, of the same speech, Bernanke added that the FOMC "will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets." Talk about mixed signals.

In less than 6 hours, the market took back almost everything I had amassed 4 days ago. Thanks to you, Dr. Ben Bernanke, and your ivy-league education. Here's a hint for next time, though. If you want to be a good policy maker, pick a side and stick to it. Don't be wishy-washy like a politician and try to please everybody. Please. For the good of the American people. Government intervention is supposed to reduce risk, not multiply it.

Shortly thereafter, starting at 11 EST till NY close, the Yen weakened. This appeared to be a 50% retracement from overnight levels of Yen weakness. However, I was not able to take advantage of this. My capital got tied up in XAU/USD, and I did not think it wise to buy AUD when the market was becoming so risk-averse.

Here are the numbers:

	24-Aug	31-Aug	long USD	short USD
CHF	1.2002	1.2079	0.64%	-1.40%
CNY	7.5576	7.5410	-0.22%	-0.54%
EUR	0.7315	0.7340	0.34%	-1.10%
GBP	0.4966	0.4959	-0.13%	-0.63%
JPY	116.39	115.72	-0.58%	-0.19%
XAU	0.00150	0.00149	-0.75%	-0.01%
ORORCL	classified	classified	-0.92%	0.16%
DJIA	13,378.87	13,357.74	0.16%	-0.92%
Nasdaq	2,576.69	2,596.36	-0.76%	0.00%
S&P 500	1,479.37	1,473.99	0.36%	-1.13%

The DJIA weekly chart, depicting a dragonfly doji candle (where prices opened high, plummeted, and then returned to the opening price), suggests that last week's temporary rally was a retracement and this week was a period of indecision. Next week's bearish candle should confirm an evening star pattern.