Waiting with bated breath for Thursday ECB meeting

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Asianmacro has many close friends in the ”real world” i.e. people who are engaged in real productive businesses or employment like doctors, engineers, businessmen, lawyers (OK maybe not lawyers) …. where FOMC. ECB, QE & other financial lingo don’t mean much to them! However, what you do not know nor care in your regular life in going for work in the morning at 9 a.m., punching out at 5 p.m. (if there is even regular hours anymore like days of old!) does not mean that you will not be affected by events & developments which only financial market practitioners care about to monitor with a hawk eye.

In fact since the 2008 global financial crisis, everything that has happened especially in the real world & economy affecting many lives can be traced back to financial markets development & actions taken by governments & central banks since.

The most important event coming up with reverberating effects globally with be this upcoming European Central Bank (ECB) meeting on Thursday 5 May.  All expectations are on Draghi, the ECB President to cut Eurozone refinance rate and unleash their version of QE as well. http://www.reuters.com/article/2014/06/02/us-markets-forex-idUSKBN0EA11M20140602 . From the chart above, we can see that EUR/USD has plunged from 1.40 to 1.36 currently in the past one over week end May as short positions (*best captured by the IMM CFTC net non-commercial positions) reached the highest level of shorts in 2014. Risk reversals volatility prices (where price of calls over puts) have fallen as well with options market pricing more demand for EUR puts over calls.

In the chart below, in fact, Citigroup Pain Index is at an extreme negative level. This is a FX Positioning Alert Indicator that infer positioning of active currency traders from relationships between exchange rates and currency managers’ returns. A positive reading suggests that currency traders have been net long the currency and a negative reading suggests that currency traders have been net short the currency, and in this case, the market is extremely short EUR.

We can also see that the yield spread between 2-year EUR rates & USD rates have gone to an extreme level since EUR rates fell a lot more & quicker in the recent weeks vis-a-vis USD rates.

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When the entire sell-side screams for lower EUR & for further short EUR recommendations into ECB meeting, this is when Asianmacro gets worried over the imbalance of sentiments. Sometimes, the markets have no logic beyond street positioning & will go to the maximum pain to squeeze out the weak hands. As such, I have close out my short EUR/USD position & in fact turned long via 3-day EUR 1.3600 strike call options NY cut expiry (NYC 10 a.m. expiry which is right after ECB meeting decision & when the ECB press conference is underway). From illustration below, it cost my only 33 b.p. (or an equivalent of 40 pips in FX terms) with breakeven at 1.3640. If Draghi underwhelms in delivering an ECB cut & tone in his press conference, EUR/USD might just fly up to 1.3750-1.3800 level and I will be a happy man via my options & allow me to re-sell EUR/USD to take profit & establish new EUR shorts if it make sense again. If ECB overwhelms with aggressive cut & dovish undertones & EUR/USD plunge further, I don’t lose much beyond my small option premium for the call option that will expire worthless.

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The EUR/AUD FX Cross and VXO alarm bells are ringing

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Illustration 1: EUR/AUD FX cross exhibit high correlation & R-square with VXO … predictive ability of unknown stresses ahead in financial markets when both heads higher?

There are a number of price movements of various financial instruments that Asianmacro had observed before that I simply do not have a logical explanation that satisfy either a scientific mathematical finance approach or a qualitative explanation.  Perhaps I do not have the eloquence nor knowledge of those strategists or economist in coming up with convincing arguments for everything that happens since my pursuit is simply on whether to buy, sell or hold in making profits as the sole objective.

One phenomena that I chance upon is the propensity for EUR/AUD FX cross together with VXO (http://www.cboe.com/micro/vxo/) to always head higher when markets enter into some uncertainty especially when negative events start occur or develop in the financial markets.

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Illustration 2: EUR/AUD FX cross heads higher post Gold collapse since 12 April 2013 & Boston bombings …. sign of potential further negatives ahead to develop in markets?

I will be very cautious and on a somewhat ”sell risk on rally” mode across various asset classes especially stocks and commodities as this unexplained EUR/AUD & VXO indicator is flashing on my radar screen.  Whether it is due to AUD/USD coming off and under pressure due to poor China economic data (http://www.scmp.com/business/money/markets-investing/article/1215611/investors-dump-stocks-poor-china-economic-data) …. or EUR/USD heading higher … Damn how can that be with uncertainty in EU still smarting from Greece, Cyprus, …… ?  It does not matter … I rather be lucky than smart!

 

 

*Asianmacro is a beach bum managing his own wealth.  Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself.  While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or  implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith.  Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication.  This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.

The Schizophrenic EUR … Time to Short the Spike !

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Illustration 1: EUR/USD schizophrenic 2 big figure range on 4th April 2013 .. initial plunge followed by spike

The FX market is always taken to be the most efficient in discounting news ahead of all other asset classes.  However, Asianmacro having cut his teeth on the FX and rates market years ago only understand too well that it is also a fallacy since the FX market tends to over simplify things based on ”sound bites” and it often over-reacts.  FX markets are always about daily to intra-day short term momentum and ”’hunting of stops to trigger” in each hour and never about medium term (and God forbids any association with long term valuation discovery!).  As such, from Illustration 1, the schizophrenic plunge and then spike in EUR/USD around the ECB press conference yesterday is just another day in the park.

Asianmacro does not believe that ECB will not at some point find ways to drive EUR weaker as the Central Banks of the world are engage in competitive devaluation ”currency wars” whether openly like BOJ or stealthily like the U.S. Federal Reserve in the past.  Europe cannot afford a strong EUR and short of allowing a breakup and letting the Lira, Peseta and Franc back to the realm, the EUR needs to be weak again to give the mix bag of countries in EU any chance of staying together.

 

 

*Asianmacro is a beach bum managing his own wealth.  Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself.  While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or  implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith.  Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication.  This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.