Painful day for Yen Shorts yesterday! We averaged down to 76.6

For those following our latest trade, they will notice that (much to our dismay) the Yen strengthened violently just as we bought our first clip of USDJPY on continued month-end support from exporters frantically buying Yen at (or around) the crucial 77 mark.

 

Indeed, the pair traded down to 76.19 by our reckoning and we have added to our position, averaging 76.6. It doesn't take a genius to figure out we are in the red (and our AUDJPY trade to a lesser extent). If we were to be shaken from the market now, it would translate to a 0.6% P&L hit and take our YTD to -0.32%.

 

Every problem has a solution

• Closed half of the USDJPY position at 76.3, respecting that we mis-timed our entry and fundamental weakness of JPY may be a while off.
• We look to add to our USDJPY position into 76 and below, basing the entire trade on the optionality of BoJ intervention.
• In this way, we form a "campaign trade" with a maximum tolerance of further 1% loss (equivalent to a ~74 USDJPY) noting that there would be considerable corporate unrest in Japan should this risk materialise.

STOP PRESS:  Japan's Finance Minister Mr Azumi warns that firm steps will be taken against excessive, speculative FX moves. USDJPY currently at 76.22.

Short Yen! Buy a Basket of USDs and AUDs

"The Yen is strengthening a lot and we are quite certain that this isnormal… but nonetheless disconcerting… end-of-month buying of the Yen by Japanese exporters. They are usually “in” at the month’s end for this purpose, and they were a bit more aggressive than usual given the Yen’s recent weakness. Fearing only a few weeks ago that they might be executing orders with a “handle” of 75, the exporters were and are ecstatic having gotten something instead with a “handle” of 77. Too, there appeared to be some added “stop loss” selling of the US dollar vs. the Yen that was touched off as the Yen/dollar rate fell to 77.25, sending it to 76.95 at one time before the dollar found support."

- Gartman Letter 27/01/12

 
Whilst we don't always agree with Dennis G, we have been trying to find excuses to enter a JPY short for the last few months and finally we have been presented with the ideal technical entry. With strong support in the mid 76s and a fundamental picture that continues to deteriorate (worsening trade balance, debt issuance problems) the comparison to a put-option is particularly apt.

This is a high conviction trade and we intend to enter it with considerable gusto, the first of such trades this year. Our entry is between 76.9 and 76.6 and our stop is 76.25 with around 1-2% risk on the table.

Hedge Funds Ramp up EURUSD Short... Momentum Changer?

The chart above, based on CFTC data from non-Commercial Speculators, indicates that there might be a time-lag between Hedgie shorts and EURUSD levels. Very interesting indeed, especially when you consider that it points to an ER of around 1.2 if the correlation were to hold up.

Important to note, though, that past correlation does not imply causation or even future correlation without argument. The sheer weight of ECB and Fed pressure in the opposite direction may well render this chart, as compelling as it may be, meaningless as there has never been a more important truism in the market right now:

"Never Fight the Fed" (or in this case the ECB)

A tidy sum from XAU, Buy On Dips!

So, XAUUSD (Gold in $$) has massively outperformed over the last few week's "inflation rally" to the tune of about a percentage point for the JF Macro Fund. We continue to sit on about 1/4 of our original position and intend to buy on dips, the one problem being that now XAUUSD has broken its downtrend resistance (see below) it may well be set to run riot.

XAUUSD (Orange), XAGUSD (White) and XAUEUR (Blue)

New Year, New Thinking….

As even this week we’ve been striving for the allusive α, we have been looking at more interesting ways of investing in CFDs and in particular single stock investing. Moving away from our regular stomping ground of FX, indices and hard commodities – gold in particular.

Read on for more from our Single Stock Strategy Team.

Gold Strategy Examined. Other Thoughts.

Having published this article last Friday, we decided that the Night(Long)/Day(Short) strategy deserved a second look.

 

Our results are presented below, plus details on our current positioning in this market - we're in the black and averaging out above 1680. 

Intraday FX Programme Alpha Testing Finished

Due to a lack of investor demand, and the intensity of man hours involved, we have formally ended the Alpha Test of the IFX Programme.

 

It achieved a 1-month return of 0.5% and we hope to revisit the concept, perhaps under a more attractive R/R, in the future.

EURUSD pops just as we bought - exited our S&P short

There's no doubt that yesterday was very much "risk on".

 

Read on below for details of our EURUSD and S&P exits and first look at a new strategy built around Gold. Meanwhile our Intraday FX Programme hit 0.39% gains for the year. 

S&P Position Hedged: We bought Euros and Gold with Dollars

Given the strong bond auctions, considerable short open interest in EURUSD (that can lead to gappy short squeezes - i.e. shorts forced to buy as stops are hit) and US Treasury selling from foreigners such as China and Russia, we are forced to consider that the markets are strong and that the LTRO, or perhaps the expectation of a massive LTRO in Feb, is shoring up risk assets.

 

We've consistently held the view that Q1-2 this year is likely to be strong as kick-the-can ECB measures take their toll. And at a rumoured EUR10trn, they are certainly a strong kick. I am happy to hold my hands up and admit I expected a harder sell-off given the downgrades and awful fundamental data from the EZ (Spain). One of the key factors in the decision outlined below is exactly this - a market that fails to react to bad news is a bull market and must not be faded. The rest of this post is the nitty gritty, the key message is that we are now flat risk assets.

 

Our outright short on the S&P from 1300 has been hedged with by buying EUR/USD and buying XAU/USD (i.e. Gold in Dollar terms) to take advantage of the "decoupling" play, covered in this blog (and elsewhere) in detail. See chart below for an intuitive visual:

 

 

 

 

 

 

 

 

(S&P in Blue, Gold in Orange and EUR/USD in Green - observe the divergence)

 

We bought Gold at a beta of 0.5 and EUR/USD at a beta of 0.6 split 50:50 - i.e. the hedge is a half and half in delta terms.

Today's No Brainer - EURUSD bounce!

Turning now to the topic of educating fellow investors, I would like to point out what has perhaps been the easiest technical trade in the past few months. Read on for more.

Away from this, current market strength based on rumours of the size of Feb 29th's LTRO (range EUR750bn to EUR1.5trn) are certainly a furrow in JFC's brow at present. The market continues to pay little respect to the 10+ ratings downgrades over the last few days (the most recent being the EFSF itself), although, as the US awakes from its long weekend the market seems to be sobering up.

Our long-term destination is tapped into the S&P's TomTom but right now signal is thin. As it is not our mandate to undergo any drawdown if it can be avoided, a Silver or EURUSD long may well be revisited as a hedge/convergence trade.

Do read on for today's No Brainer.

Our short remains open, +0.4% MTM. Main move to come..

Given that much of the market reaction to S&P's downgrades was priced in as early as November , we are yet to see a material move in risk asset prices. Indeed, some commentators argue that away from "priced-in-ness", the most pressing and worrisome issue is the continued crumbling of Greek PSI talks.

EURUSD ripped the most on Friday as signal that the plight of the world's most shorted currency appeared to be ending. A strong rally early against USD and other 'dollar currencies' (AUD etc) had signalled an end-to-the-trend and the bull argument seemed to tempting for some as EURUSD hit 1.287. But it was precisely these technical factors that contributed to such a sharp fall as the rumours began to manifest - stops were hit and limit orders triggered, causing further selling.

Our best read today: Here's Why Downgrades of European Nations Are Still Important

Market Flash: S&P rumoured to be on the cusp of downgrading Europe

Presented without comment:

"LONDON (Dow Jones)--The Standard & Poor's ratings agency could announce the
downgrades in the credit ratings of a number of European governments as earl
as Friday, said two government sources familiar with the matter.
One person familiar with the matter said an S&P notice is being circulated
among euro-zone governments and that an announcement "could be imminent."
S&P declined to comment on the possibility of an imminent announcement on
euro-zone credit ratings. S&P had placed 15 euro-zone countries on negative
credit watch on Dec. 15."

The way I see it: Friday

A pleasant end to the week for us at JF. Both funds are performing, the in-the-money Macro position announced yesterday to be hedged by either EURUSD, Silver or both, and the market appears to have settled for yet another virtually flat week. These low volume markets are especially interesting for long term bears such as ourselves. The only near term hiccups: bloated short interest in EURUSD and an surprisingly impressive LTRO reception.

The extra keen JFers would've noticed that a cool 0.1% was made this morning on a long AUDEUR position in the Intraday FX programme. We can't say we didn't warn you!

Macro fund trade taken! We are short the S&P from 1295

Less than 24 hours after our post about waiting patiently for a trade, our hand was forced as the S&P-EUR basis widened to it's record level, which screamed unsustainable. The US is only thinly insulated from EZ woes (many argue only by time lags) and the head-in-the-sand equity bulls will eventually be forced to deal with deteriorating us data [EDIT: Initial Jobless Claims have just massively disappointed at 399k vs 375k exp.]

Choose your Weapon: Our Intraday FX Fund Marches On!

As part of our live test of the No. 2 Fund (Intraday FX Programme) I'm excited to report the continued performance of this strategy. Whilst it's still very early days, this should open up an added dimension to our product choice for investors - a more conservative option, expected to return 0.05% per day (~10% per annum) that exhibits very little variance and draw-down.

Aussie pops again this Morning, as forecast!

Yesterday's post on a bounce off 1.02:

This morning's chart, an over 100 point pop...

I expect a little bit of weakness to kick in later today as the EURUSD struggles with 1.28. Equities have continued their upward march, and this de-coupling of FX risk and "everything else" persists.

At some stage we will see a sharp (200pips in one day) EURUSD correction, as the excessively swollen amounts of short interest in this pair are forced to unwind. Of course if equities blink first, expect to see much more press coverage of the crisis, leading to November lows and the inevitable over-sell into a Feb/March rally.

Glossary of Terms and Ideas

Some Thoughts on the Aussie..

The bid side on AUD seems exceptionally strong at the moment. The chart below sees our raging bull against the pitiful, depressing EUR.

No contest.

Given we've had a slight retracement from the highs, a long position here is very attractive, especially since we expect this trend to continue on the back of commodity correlation and possible further EUR weakening.

But given our fairly esoteric disposition, a simple Buy here seems to easy and 'naked'. Indeed, there is no such thing as a free lunch and supposed no-brainers often end up as the most costly and psychologically damaging of trades.

We prefer to play the AUDUSD, with a bullish bias and paying regard to the very important level of 1.0200. Just look how the currency has treated this level in the past few months. It really is so blatant it seems almost unfair to trade off it.

It has been a mainstay play of our FX Intraday Programme so far this year.

Covenants and Re-Financing Success for Seanergy

4G, the UK and M-Commerce

With the threat of 4G networks coming to the UK in the future, the not so distant future, m-commerce is set to boom globally.

JF Capital launches FX Intraday Programme

As part of our complete investor package, our FX Intraday Programme has gone into testing phase Alpha.

This set of strategies will seek a lower R/R ratio, be more liquid for investors and compound more frequently. Live launch not expected until Q3 2012.

You can review its performance here.

Correct on 2012 So Far.

Morning all. As we expected, the first week in 2012 was a welcome relief from the downbeat tone towards the end of 2011. Now, as NY hysteria dies down, the strongly bid markets have become more melancholic into mid-Jan with the Euro tearing into 1.26XX territory against the Dollar.

I wouldn't be surprised if we saw a flat week, setting up some sort of equity-currency "re-couple". As we can note in the chart below, investors have markedly fled from the risk currency (EUR) but other risk assets, notably the EuroStoxx, are yet to follow suit.

2011: Not Such a Good Year, Unless your Venezuelan

Out of 52 popular stock market indices all but 4 were nil or negative. The MSCI world stock market index fell by an impressive 8.5% outshining the developing markets index by 0.9%.

As you would expect the EZ did particularly badly (-17%) with Greece hitting -50%.

Venezuela managed to take the most improved award climbing 79.1%, due to economic growth, improved confidence after the demise of Hugo Chavez and a CPI increase of 28% due to the thin market nature of Venezuela causing price volatility that hopefully will less with the incumbent president, hopefully! This will be especially true if anti-capitalism laws are curtailed more in the future.

This change in fortune due to presidential change may in some way lay down a pattern for growth across the North African Arabic countries with new more democratic governments and more liberal capital markets. Expect to see continued volatility in their markets as the transition continues, with the potential for put and call options flourishing in such uncertainty.

Stockmarket index changes for 2011:

2 Charts for the Next Few Months

Presented below with little comment - 2 Charts that are playing on our minds whilst our views form for 2012. Click to enlarge.

And 2012 begins strong

The bond markets opened up with a markedly different tone this morning as a new buzzphrase lines the lips of clients and brokers:

 

"LTRO Arbitrage"

 

With the relaxing of collateral requirements for ECB funding access, commonly thought of as "backdoor QE" since it undoubtedly floods financial markets with new liquidity, the Eurozone has commenced 2012 on a stronger than expected footing.

 

There has been much debate as to whether these 3yr low-rate loans will actually ease sovereign bond flight, with many commentators arguing that banks will simply use this cash to shore up balance sheets and deleverage. However, with some encouraging Italian auctions and with Spanish paper tightening in markedly over the Christmas period, the evidence would suggest that, at the margins at least, the LTRO arbitrage (borrow from ECB lend to Sovs) is seemingly alive and well.

 

Of course this is of little comfort in the long-term. Indeed, these measures (combined with the new Fed Swap line announced early Dec) are purely in place to buy time for further policy. We reiterate that there is 0% chance of growing out of this debt. The options are:

1. Inflate

2. Restructure

3. One-time Tax

 

All seem implausible just now.

 

Regardless, over the medium term we have begun to build a slight bullish bias, certainly for the next month to 3 months..

 

Injections of steroid capital require investors to treat markets with short term respect, long term skepticism.