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.]
As we placed our S&P short at what proved to be the market top, I was hesitant to long the EURUSD on conerns that that Draghi would hold interest rates, sending perhaps a slight downward shudder into the Euro. The alternative presented itself as the mid-term bull currency AUDUSD, i.e. short S&P long AUD on a 1:1 percentage term basis, but we noted considerable resistance at the 1.038 region. I'm always reluctant to place a hedge for the sake of it, especially if you're certain it will haemorrhage money initially.
The net result was a naked S&P short from 1295, and as the chart below shows, we were fortunate to time the position at a short term overbuy.
Eventually we will hedge this position, as this is a basis trade more than an outright short and there is plenty of scope for more stength as sovereign bonds stage a minor recovery. It remains to be seen what instrument will be used.
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