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August 29, 2014

The race to the finish

Filed under: Forex Strategies — Tags: , — admin @ 4:42 pm

Apologies for the lack of postings this week but Macro Man felt curiously uninspired by the ongoing rally in all manner of assets.  Big-figureitis is a well-known behavioural phenomenon, and now that we’ve traded SPX2K it will be interesting to see if profit-takers emerge.

Of course, with the end of the summer upon us (the Macro Boys are already back in school), following next Monday’s Labor Day holiday it seems reasonable to expect trading desks to be fully staffed full of well-rested punters looking to make their years.  Indeed, it’s become something of a depressingly familiar phenomenon in the macro space for traders to scuffle for the first eight months of the year before throwing a bunch of risk at the market from September onwards to snatch victory from the jaws of defeat.  Strangely, “put it all on black to recover your year” seems to be absent from most marketing materials….

This year, the first eight months have been unusually challenging; from the moment the market opened on Jan 2, many punters have been underwater thanks to sharp reversals in last December’s favourite trades.

This naturally leads Macro Man to wonder where markets are likely to allocate risk over the next few months in 2014’s version of the race to the finish line.  Naturally, he has his own suspicions, but he’s curious what the informed readership of this space make of things.   With the Fed outlook likely to come under particular scrutiny, there is of course no guarantee that the market pricing of the past few months will predict future pricing.

So what say you, readers?  Please fill in the survey below.   Obviously the answers are necessarily simple, so if you have a theme or specific trade that is not listed, click on ‘other’ and fill in the blank.   If the form is working properly, respondents should be able to view the results.

EDIT:   You can see the results here.


August 22, 2014

Clowns to the left of me, jokers to the right

Filed under: Forex Strategies — Tags: , , , — admin @ 4:43 pm

In her Jackson Hole speech today, Janet Yellen released a technical note detailing the construction of the Fed’s new labor market conditions index (LMCI), which she cited as among the reasons to maintain an exceptionally accommodative monetary policy.

She failed to cite the fact that the index has enjoyed its longest uninterrupted string of quarterly gains in the nearly 40-year history of the indicator, a period which includes a labour market downdraft every bit as vicious as that of the Great Recession.


Moreover, she also fails to note that the cumulative improvement in the index has taken it to levels at which virtually every prior tightening cycle during the history of the indicator had already taken place.   Macro Man took the liberty of constructing such a cumulative index, using the data that the Fed very helpfully provided.

It’s true that the index has yet to reach the apex of prior labour market cycles, but good Goddam, that’s hardly a useful threshold to contemplate the start of a tightening campaign.   For those readers with short memories, the last two proper tightening cycles (starting Feb ’94 and June ’04) concluded with eye-watering bubbles caused by overly-easy monetary policy.

Small wonder, then, that Macro Man and other punters sometimes feel like we’re caught in a Stealer’s Wheel song….

August 21, 2014

The impossible trinity?

Filed under: Forex Strategies — Tags: , — admin @ 4:42 pm

Just ahead of the week’s big Fed events, and with the sour taste of the BOE’s zigging and zagging left in the mouth, Macro Man cannot help but observe an unusual confluence of curious market pricing.  To wit, the SPX is near all time highs, while both bond prices and the DXY have also performed very strongly.

Economists are familiar with the term “impossible trinity”, referring to the fact that a nation cannot have an open capital account, an independent sovereign monetary policy, and a fixed exchange rate simultaneously.   You can try, of course, but it always ends in tears (see Asia, 1997-98.)

In any event, since the advent of the euro as a credible alternative to the dollar as a reserve currency, in market terms it has been something of an impossible trinity to observe a strong equity market (meaning risk appetite is high), a strong bond market (demonstrating ample monetary liquidity), and a strong dollar (which has tended to benefit from either risk aversion or interest rate support.)

To demonstrate the anomaly of current market pricing, Macro Man constructed a simple index, wherein he took current pricing of the SPX, DXY, and 10y bonds (approximated by using the inverse of 10y swap rates), calculated the rolling 1 year percentile ranks for each market, and averaged them.  As the chart below illustrates, the current average (98.4th percentile) is the highest since the Internet bubble and its immediate aftermath, when the euro suffered from significant credibility issues (where are you now, Oskar Lafontaine?)

Now, perhaps we’re observing a regime shift as the market prices the DXY off of European rates rather than US ones., while assuming (as some commenters have asserted) that rates are never going up again.  Perhaps.   The other alternative is that markets are currently holding a highly unstable equilibrium, which will come undone when subjected to some sort of shock, such as…oh….a hawkish surprise from the Fed.  

There is of course no guarantee that this will come this week.   Nevertheless, those loading up on Spooz, bonds, and USD’s should be aware at just how unusual the current market pricing is.  Forewarned is forearmed!

August 13, 2014

You wonder why macro isn’t making any money?

Filed under: Forex Strategies — Tags: , , , , — admin @ 4:42 pm

Short sterling pricing before UK Mansion House evening, June 12th:

The money quote from Mark Carney’s speech:

“This has implications for the timing, pace and degree of Bank Rate increases….It could happen sooner than markets expect.”

The trend in economic subsequent data has been broadly neutral:

And yet the BOE releases in inflation report today that, accompanied by Carney’s testimony, has been seen as overwhelmingly dovish.   As a result, current pricing of short sterling is as follows:

If you’re paying attention, you may notice that this now prices lower rates and less near-term tightening than was the case when Carney issued his warning two months ago:

Remember, kids:  Carney folk are frauds and their games are rigged against you!

August 12, 2014

Guardians of the Financial Galaxy

Filed under: Forex Strategies — Tags: , , — admin @ 4:43 pm

Macro Man had the, ahem, “pleasure” of taking his youngest, Macro Boy the Younger, to the cinema over the weekend to view the latest comic-book blockbuster, Guardians of the Galaxy.   As he was watching and averting questions about Jackson Pollock, it occurred to him that many of the characters bore more than a passing resemblance to some of the “heroes” of financial policy-making that he’s observed over the years.  Call them Guardians of the Financial Galaxy, if you will:

Peter Quill:  He’s a bit shifty, a bit of a know-it all, and he’s been living in a region of the galaxy that’s not where he was born.  Even when he’s trying to do the right thing, he can move the goalposts and hoodwink people to get what he wants.   He has a number of unconventional gadgets that help aid him along the way.   He’s the star of the show, as he’d no doubt tell you if you asked him.   Who could it be but Mark Carney?   (Apologies to James ‘Hollywood’ Bullard, but the casting director thought he was a bit out of his depth.)

Gamora:   A woman in a made-dominated world, she kicks ass while cleaning up a lot of other people’s messes.  With the guts to be bold when it’s required, she’s not afraid to leave her natural surroundings to fight for what she believes in.   In  a bit of a surprise, Gamora is represented by Gill Marcus  of the SARB.

Rocket:   A smug know-it-all who isn’t quite as clever as he thinks he is, certain aspects of Rocket’s physiognomy recall a well-known Wall Street Journal writer who’s the frequent recipient of dodgy leaks from the Fed.  However, it would be grossly inappropriate to elevate Mr. Hilsenrath to such a prominent position, so we must focus on Rocket’s winning personality.   His hectoring, badgering tone and seeming inability to recognize his own tactical failings will be instantly recognizable to anyone who ever sat though one of Jean-Claude Trichet’s  press conferences.

Drax the Destroyer:  In his comfort zone he appears all-powerful  and can intimidate lesser beings to bend to his will.   However, when confronted with larger forces his strength is impotent, and it turns out he isn’t actually all that clever; some of his policy choices are actively harmful to the greater good.  His nickname says it all, really, and the fact that the character shares a name with a prominent interest rate futures brokerage is icing on the cake.   Who could it be but Alan Greenspan?

Groot:  This half-creature, half tree is notable for his strength and his inability to say anything but one phrase.   From her wooden performances in press conferences and Congressional testimony to her endless repetition of the “more accommodation needed” mularkey, Janet Yellen is Groot.

August 8, 2014

A few things we’ve learned this week

Filed under: Forex Strategies — Tags: , , , , — admin @ 4:42 pm

1) The ECB does not wish to become a sausage factory

2) Russian banks can still access ECB liquidity, but only if they bring a note from their mother, two box-tops from Cheerios, and promise really hard not to use the money to circumvent sanctions

3) Actually, given the Russian counter-sanctions and their devastating impact upon the Norwegian lutefisk industry, scratch the Cheerios requirement

4) ECB rates may stay low til the end of the decade…rumours abound that another Dutch candidate
 will succeed Draghi

5) As one commenter noted, the days of + Sharpe lazy longs in credit are over….roll on the days of 5+ Sharpe lazy longs in Bunds!

6) The 4-week average in initial jobless claims has hit eight-and-a-half year lows.   Based on Macro Man’s assessment of the current environment, roughly half of the claimants are macro punters

7) In a change from the last 2,000 years, the Middle East is a disaster

8) Although the top may well be in for credit, we’re not quite at the point where it goes down in a straight line

August 2, 2014

Casino Royale

Filed under: Forex Strategies — Tags: , — admin @ 4:42 pm

The scent and stink and sweat of a trading floor are nauseating at eight in the morning.  Bacon sandwiches and lashings of hot black coffee on top of the previous evening’s excess are sufficient to blow an ill wind through even the most iron of constitutions, and in the close quarters of a trading desk there is a palpable atmosphere of discomfort.   Then the soul-erosion produced by trading- a compost of greed and fear and nervous tension- becomes almost unbearable as the senses awake and attempt to revolt from it.

James Bond sat at his desk and looked at the bank of multi-coloured numbers flashing merrily on his trading screens.  He told himself to stay focused, to not get distracted by his neighbour exhaling heavily and fanning himself with a folded tabloid newspaper.  Instinct told him that danger lurked below the quiet surface of the market like a barracuda in search of prey.

Bond glanced at his watch.   The burnished steel hands on the black lacquered face of his Rolex Submariner read 8.09 on the first Friday of the month.  Ninety minutes earlier he had been behind the wheel of his Bentley Continental GT Speed, harnessing each of its 645 horses as he made a racing change onto Park Avenue and sped towards midtown at ninety.

The memory of the Bentley’s throbbing engine brought the hint of a smile to .his face.  As a young man Bond had been introduced to the marque by his first Chief, M3, that grizzled relic of an earlier era.  Under the old man’s direction Bond had been to Hell and back, but regarded him with the special affection that the most successful young traders feel for a tough but fair mentor who pushes them to their limits.

As the world became more complicated, however, M3’s ability to influence policy decisions waned, and he had finally been put out to pasture for good in 2006. Bond still missed the days when the red phone would ring with an order from M3 that would put him in positions of almost unbelievable danger.  For much of the past several years, however, he had had to navigate an environment of seemingly perpetual crisis, including a series of harrowing adventures aboard the QE2 and her sister ships.

He returned his gaze to the screen.  The prices seemed hesitant, unsure, almost as if they were awaiting the orders of a higher authority.  Bond sighed and sat back in his chair.  He caught a movement out of the corner of his eye and swiveled his head.   Miss Moneypenny, the delectable team secretary, was walking down the aisle with a sheaf of papers in her hand.  She gave him a winsome smile as she dropped them on his desk.  “From Research Section, James.”

“Moneypenny, is tonight the night?   Champagne and caviar after the close?”   He gave her a huge wink.

“Oh James, don’t tempt me,” she said breathlessly, and with a swirl of her just-long-enough skirts marched back to her desk in the corner of the trading floor.

Bond grinned and glanced at the papers.  Most of them were routine dockets which he ticked off quickly and put in a pile destined for the shredder.  One, however, labeled “Most Immediate: Le Chiffre” caught his eye.  He picked it up and read.

To:  All personnel

From: Research Section

Station W has learned that an agent known  as Le Chiffre is likely to be operating in financial markets at approximately 8.30 am on the morning of Friday, 1 August.  Mr. Le Chiffre (alias The Number, The Cypher, Nicolas-Francois Parolle) is believed to be a member of an organization known as SMERKT, the name of which derives from the Russian smert’ k torgam, ‘death to trading.’  It is our view, along with the American BLS and FOMC, that this organization is dedicated to the destruction of the trading profits of Western financial institutions.   Our Board believe that it could prove as inimical to our interests as SMERSH and SPECTRE were several years ago.

Le Chiffre is thought to be an erratic adversary who may not be what he seems at first glance.  All agents are ordered to keep an immediate watch out for Le Chiffre, to notify headquarters if he is located, and to take appropriate action to neutralize the impact of his scheme on our interests.

Bond put the report down and leaned forward into his desk, wincing his eyes and concentrating.  Le Chiffre….Le Chiffre.   Bond couldn’t quite dispel the notion that he knew that name.   But from where?

He picked up the paper and studied the list of aliases carefully.   “The Number”….he was sure that he had encountered something like that before, and that it hadn’t been a pleasant experience.  Absent-mindedly, Bond slipped his hand into his pocket and fingered the miniature laminated Warwick PPE degree that he liked to keep hidden.  The PPE had gotten him out of tight spots before….would he need it again today?

His eyes flicked to his watch again.   8.25, the dial told him silently.  Almost time for Le Chiffre to make his appearance.  Bond cursed silently and told himself to think harder, to penetrate this shadowy figure that represented “death to trading.”

On his Bloomberg terminal from IT Branch, Bond punched in the letters “ECO US” and hit enter.  Scrolling backwards, he noticed an entry entitled “ADP” for Wednesday, with a tiny “215” next to it.  Something about this line didn’t look right.  What government agency releases something called an ADP?

Bond found himself reaching for the red phone button that connected directly to Headquarters.   Slipping on his wireless headset, he hunched over his desk and covered the mouthpiece with his hand to avoid being overheard.

“Bill?  It’s me,  Bond.   I think I have a lead on Le Chiffre.  I found a suspicious entry when reviewing the US economic calendar.  Something called ADP.  It doesn’t fit with the rest of the data releases, and I’m sure it will give us a line into what Le Chiffre is going to do.   How good of a line I don’t know, but it’s all I have to go on now, other than the general profile of how Le Chiffre has behaved in the past.”

“Okay, keep following that trail and see if it leads to Le Chiffre,” said the dry voice at the other end of the line.  “If you find him, at this point you won’t have much time to counteract him.   Use your instincts and do the best you can.  And 007,” the voice said, almost as an afterthought.  “Be careful.”

Bond had earned the coveted 00 prefix, which gave him license to trade any asset that caught his fancy.   Most of the agents on the desk were specialists; there were only three of them that had won the right to join the 00 section.

Bond scrolled forward on his ECO US screen until the day’s date- August 1- appeared.   His eyes scanned the entries, then stopped at one line.   He felt his blood turn cold.  “Non-farm payrolls.”   NFP.   Nicolas-Francois Parolle.  The Number.  Le Chiffre.

In his mind’s eye he could see himself seated at a table with Le Chiffre and other indistinct figures, his hands on the green baize of the table’s surface.    He could hear the riffle of the cards, his voice saying “Banco”, receiving a good hand.  Bond then imagined a slow smile on the face of Le Chiffre, the dispassionate voice of the croupier saying “Neuf a la banque.   Monsieur Le Chiffre gagne.”

Bond shook his head to clear the vision and tried to forget the imaginary defeat.   The digital clock on his screen said 8.29:55.   He took a deep breath and got ready to enter the Casino Royale.

Who will win?   Bond or Le Chiffre? Watch your screens at 8.30 am EDT to find out. 

August 1, 2014

Le jeu est fait

Filed under: Forex Strategies — Tags: — admin @ 4:43 pm

As the digital clock ticked over to 8.30, Bond watched his screen carefully.  Le Chiffre showed his hand, and while it was a good one, somehow it wasn’t quite as good as Bond had feared.   Looking at his own position, he exhaled and felt the tension drain from his body.  Bond’s hand was superior.  He had won.

Bond accepted the congratulations of his fellow agents with dispassionate grace.  Somehow, he almost felt disappointed.   Defeating Le Chiffre had almost been too easy.  So much for Research Section’s warning to expect an adversary as dangerous as SMERSH or Blofeld’s SPECTRE.

After taking a last swig of coffee, Bond rose from his chair and strode purposefully out the door in the corner of the trading floor.  He punched the ‘G’ button in the wood-paneled lift, then closed his eyes and leaned back against the wall of the small enclosure.  Perhaps Moneypenny would take him up on his offer tonight?  Or maybe he should ring up that fit instructor from the cycling studio…

As the lift doors open, Bond reached into his pocket and extracted the gunmetal cigarette case.  Opening it, he took one of the gold-banded cigarettes made specially for him by Merloni Bros. and lit it with his antique Ronson lighter as he exited the building.   Taking a deep drag, Bond watched the pedestrians stream by.  How little they knew of the dangers from which Bond had protected them!

Suddenly, Bond’s mobile phone began to ring.   He fished into his pocket to retrieve it, then answered.  “Yes?”

“It’s 009.  You’d best get back up here, 007.   Something’s not quite right.”

Cursing silently under his breath, Bond took a final puff of his cigarette, ground the remainder under his heel, and re-entered the building.  A 30-second lift journey can seem like an eternity when your position is coming a-cropper and you don’t know why or how badly.  Bond gave a sour look to the man who darted into the elevator just as the doors were closing, then pushed the button for the floor two levels below Bond’s.  Another ten seconds added to the journey!

When the lift doors finally opened onto his floor, Bond fairly sprinted back to his desk.  009 was waiting for him with a worried look on his face.   “It’s your friend Felix Leiter, 007.   Le Chiffre seems to have caught him out and it looks like he’s in rather a bad spot.  He managed to get a message out to warn you.”

“Thanks,” said Bond coolly.  “Eh bien, Le Chiffre.  Le jeu est fait.”

Stay tuned to your screen to see if Bond can survive his encounter with the treacherous Le Chiffre.

Macro Man is a charity bike ride this weekend and will be away for a few days thereafter.   Bonne chance a tout. 

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