With the Yen trade having moved into net positive territory, we put our heads together and decided that, in no uncertain terms, no matter how strong the technical factors calling for a USDJPY sell off, we really do not want to be net short dollar risk - i.e. indirectly betting that agents will stop buying treasuries.
The house view is that, in time, equities are overdue a sell off. Indeed, credit (a market of "professionals" with little retail activity) has widened substantially further than stocks have fallen. However, with this view we contend the "Law of the Turkey", otherwise known as the hallowed Christmas rally.
For this reason we are skeptical about holding an unhedged short position on risk.
Our alternative is a 3-asset hedge, with a slight short bias as November may still bring a little more pain.
The Big Position:
- Continue to short USDJPY expecting Yen to appreciate.
- Hedge our USD exposure by being short the FTSE @ 5491 (Entry at 15:03) Stop @ 5580.
- Hedge our exposure to Euro QE by being long Gold @ 1760, noting that we also saw an oversell today at around 15:00 - the entry trigger. Stop @ 1690
Net/Net we believe we are short risk (hard to be certain with correlations changing daily), with about 4% of NAV max loss and are working towards setting a price target. As always stay tuned.
P.S. 4% max loss is about our maximum tolerance vis-a-vis our "Big Position".
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