So far USD/JPY has shot to 79.48 from a low of 75.57 and the pair looks like it will push higher after the Ministry of Finance chomps through another set of sell orders around 79.20. Officials may take aim at 80.00 but based on the comments out of Japan, a Swiss-like peg doesn’t sound likely.
What also has the market spooked is a few headlines from the Wall Street Journal suggesting that clearinghouses and regulators are preparing for an MF Global bankruptcy filing.
EUR/USD is down 120 pips, cable down 150 pips, AUD/USD down 165 pips, USD/CAD up 70 pips and gold down $35.
Intervention and bankruptcy are two of the trickiest trades out there. On the one hand, this channels Lehman and the crisis but MF Global isn’t a huge employer. On the other, what happens as all those bonds hit the market in liquidation. It certainly won’t help Italian spreads.
I want to trade this but I don’t need to trade this, so I’ll sort it out in the morning. If anything, I’m thinking of adding to my EUR/CHF long as traders are reminded about the power, and potential profits, of intervention.
USD longs versus CHF (at 80.12) and JPY (at 77.92) on July 27. Stopped out of both trades on July 29 July 29. Result: -60 pips
Entered with stops at 79.82 (30 pips) and 77.62 (30 pips). Greatest open loss: 30 pips. Greatest open gain: CHF +34 pips; JPY negligible
I entered this pair of trades at the same time. This was late on Wednesday, with a weekend debt ceiling deadline looming. The idea was simple: any good news about the US debt ceiling debate would lead to a pop in USD/JPY. At the same time, USD/JPY had leveled out around 0.8000 so it looked well supported.
What I should have known better: Never bet on the sanity of US politicians. They continued to bumble along until the weekend and eventually made a deal with hours to spare before the Aug. 2 deadline. Part of the reason I erred was because I believed it was necessary to have a deal before the weekend. Media reports mislead me. The lesson, I guess, it to only trade politics if you know the system inside out.
What I’m happy about: The stop was certainly in the right spot. I for 30 pips I bought myself 36 hours of negotiations. When the deal was finalized, it led to a 120 pip (JPY) and 140 pip (CHF) bounce. The rallies were about what I expected. So I took a gamble with 4×1 odds in my favour and lost on bad timing.
Entered USD/JPY short at 79.21 on July 4. Added July 21 at 78.49. Exited July 25 at 1.0627 (+120 pips) and July 27 (+42 pips). Result: +168 pips.
Entered with stop at 79.56 (35 pips). Greatest open loss: zero pips Greatest open gain: ~200 pips
I entered this trade on my expectations of problems with debt ceiling talks. On July 18, we were two weeks away from Aug. 2 deadline and expectations were for a deal to get done. The trade was based on my belief that nothing gets done easily or smoothly in Washington – a trade I’ll make every day of the week.
I shared my analysis in a post entitled: Debt Ceiling Hiccups to Come Sell USD/JPY. I wrote “Every story I’ve read late on Tuesday sounds like an agreement is just a matter of hammering out some details and drafting a bill. That is NEVER the case in US politics.”
What I should have known better: If I would have held the trade until July 28, I would have made 385 pips. The time from the 24 Jul to 28 Jul was frustrating because the news kept getting worse but USD/JPY wasn’t breaking down. There was lots of talk about barriers at 78.00 and 77.75. The news was progressing exactly as I expected but the market wasn’t acting how I expected so I cleared out. I suppose that was a wise move with the first half of the trade but with the second half, I should have just moved the stop lower instead of rushing out of the trade. A bit too cautious.
What I’m happy about: Many things. First, I was never holding a loss on a trade that earned 168 pips. Second, I didn’t jump into the trade on July 18. Instead I waited for a bounce. Even though the bounce was only 15 pips but it was a good start to a very disciplined trade. Third, I added to a winning trade. Fourth, I moved my stops down all the way.
Bonus thought: Look how oversold the RSI is, I almost want to buy USD/JPY expecting a bounce in the next 2-3 days on a debt ceiling deal.
Our base case is for a bounce in stocks and USD after a debt ceiling deal is reached. We see a 90% probability of a deal before markets open on Monday and we will continue to trade in that direction.
Our trades were working for us until late in the session Thursday when sentiment worsened after S&P sovereign-rating chief John Chambers re-emphasized the importance of $4 trillion in savings. Both parties are currently proposing less than $3 trillion in savings so it looks more likely that S&P will have courage to cut.
Republicans postponed a vote on Boehner’s debt ceiling plan minutes before it was scheduled, likely because they did not have the votes in their own caucus to pass it. In any case, the legislation had no chance of getting by the Senate or the White House, so the delay could be helpful for negotiations. A vote is expected later in the evening but it is unlikely to move markets.
VP Biden is said to be in talks with Senate Republican leader Mitch McConnell on a deal. McConnell earlier said THE ONLY REAL STICKING POINT between the two sides is a Republican insistence on a two-stage ceiling increase process. We see this as a good sign for our USD/JPY and USD/CHF longs. There are also reports that a short-term debt limit extension may be possible if no agreement can be reached.
The QE3 debate will re-ignite after the debt ceiling and downgrade drama passes. The Fed’s Lacker (voter in 2012) called the US recovery decidedly mediocre but said the factors that have held growth back are beyond the Fed’s control – a signal that he will not support further QE. He said the US doesn’t face a significant risk of growth below 2.75% in the next two years.
Separately, the Fed’s Williams (voter in 2012) said the Fed may need to increase stimulus but that there is a “high hurdle” before he will consider it.
A broad slate of economic data from Japan will be released at 2330 GMT including CPI, employment and household spending. Industrial production will follow 20 minutes later. All the data is for June. It’s difficult to strategize around these numbers because of potential skews from the disaster but overall we expect a straightforward reaction with JPY strength on upbeat growth numbers.
Not long ago, Geithner was pronouncing the US would never lose its top rating but now the market is in the process of pricing in a downgrade. The S&P 500 fell 2% to 1305 on Wednesday and is the process of putting in its worst weekly performance in almost a year. The consensus is that the US dollar will continue to fall but it may not be as straight-forward as advertised. A continued decline in the stock market will provide a safe-haven boost to the USD as will higher bond yields. The resulting slowdown in the US economy may also weigh more heavily on Canada with risks to the other commodity producers and the economies most tied to US consumption.
At the moment, the situation is looking dire but what’s has been lost is that DEBT CEILING NEGOTIATIONS ARE MAKING PROGRESS. Boehner is reworking his proposal and appears to have his own party on board. Reid is also looking for additional cuts in order to satisfy the dollar-for-dollar demands from Republicans. The sides now don’t appear all that far apart and we estimate a 75% probability that will we have the framework for an agreement before markets close on Friday.
This will present the opportunity for a significant relief rally in the time between the passage of the legislation and decisions about the credit rating. There’s also the distinct possibility that the ratings agencies don’t have the courage to downgrade the US. Based on this, there is room for a bounce in USD/CHF and USD/JPY — both may have stabilized and at oversold levels.
THE RBNZ HELD RATES AT 2.50% as expected and Bollard said the economy grew more strongly than expected. The central bank leader telegraphed an upcoming rate hike by saying there is little need for the 50 bps March “insurance” rate cut to remain “much longer”. The market has priced in 100 bps in hikes in the next 12 months but nothing beyond 50 bps is guaranteed. Bollard may have done a good job talking down NZD by nothing that if the currency’s strength persists, it will reduce the need for rate hikes.
It’s getting more difficult to avoid insults and hyperbole when describing the debt ceiling imbroglio. Surely you haven’t stumbled here looking for a recap of the day’s news so I’ll spare you the exercise save for a few thoughts. 1) On Tuesday it actually appeared that debt ceiling talks were moving backwards. 2) the real deadline is around Aug. 15. 3) We estimate the likelihood of a downgrade from S&P, Moody’s or Fitch at 70%. 4) the US looks increasingly to be on the precipice of another recession.
We remain short USD/JPY. We booked a 120 pip profit on the first leg of the trade and we’re up 51 pips on the second leg (entered at 78.46). We’re moving our stop down to our entry on the second leg, ensuring that we’re now trading with house money. We really like this position right now and if we were a tad more greedy we would be adding to it. It looks to us like there might be a sharp breakdown below 77.75.
Our latest trade is in AUD/USD which is hovering around 1.0950. It’s going higher. Four days ago on Twitter (July 21) with AUD/USD at 1.0830, we wrote “Beautiful breakout in AUD/USD. That will be testing 1.10.” We’ve climbed 120 pips since then and we’re sure that the record of 1.1012 will fall. The catalyst is going to be a high Q2 CPI reading (above 0.8% q/q on the trimmed mean) today. We are buying AUD/USD asap with the announcement coming on Twitter via @FX_Button. We will hold it until the news turns better on debt ceiling talks.
As a trader, I want to use the positive sentiment that has built up here to sell USD/JPY. The pair is trading at 79.21 and that will be my entry point. The initial target is 78.50 and unless the newsflow starts to change, I will be selling there. My stop is at 79.56, which is a bit tighter than I like but on an event-driven trade, it’s probably prudent.
Here’s my reasoning. Every story I’ve read late on Tuesday sounds like an agreement is just a matter of hammering out some details and drafting a bill. That is NEVER the case in US politics. The moment some kind of consensus builds, every power-hungry politician will look to insert his/her input. I think it will only take a minor hiccup to send USD/JPY to the initial target. What’s especially instructive is that despite the incredible volume of good news and risk appetite today, USD/JPY was only able to climb 15 pips. Sellers in control of this pair and I’m selling with them.