Macro themes idea generation

I couldn't find a macro thread so I decided to start one for sh*ts and giggles. For those who don't know, macro trading is like fundamental trading but with a focus on major trends that moves entire economies. It looks at demographics, geo-political tensions, divergence between monetary policies, those kind of things.

One exemple of a FX macro trade is back in 2014 when M.Draghi had its famous "whatever it takes" speech while at the same time the FED was starting to get more "hawkish". The EUR/USD tanked like a rock. It was a fairly obvious trade (full disclore, I tried to buy the bottom and got destroyed). Same with oil around the same time: shale was taking over in the US which lead to excess supply and usd was getting stronger which lead to a steep drop in oil, CAD, I assume NOK and it affected everything oil related.

As long as you have some research to back your ideas, post them, no matter how crazy they sound.

The rules are simples:

1. As long as you have some research to back your ideas, post them, no matter how crazy they sound.
2. critics of other people ideas need to be backed up by something credible (numbers, charts, research)
3. we judge ideas, not people. We are not building egos but trade ideas.
4. failure to comply to those rules will get you banned, swiftly.

just in case you did not figured out yet, none of this is investment advice. It would be most unwise to invest money because an anonymous forum dude had an idea, your money your risk.

With that being said, if we put all our feeble minds together, we might muster one or two decent trade ideas while at the same time get material to sound smarter at our next family dinners. Honestly, I don't have any hopes, I don't think this kind of topic interest people on most trading forum but who knows, maybe it will catch on.

Let me start with a bold trade idea.

Currency pegs snap, its what they do (sometimes). USD/HKD is pegged. I was watching the news recently and heard that China's shadow is looming large over Hong Kong. And I was thinking that could spark capital flight from HK. The economy is probably one of the most leveraged in the word. Real estate prices, which were already at ludacris levels, more then double in the last 10 years. It may be a bubble but it also may be just the lack of space, I dunno. But it is puts the country in a interesting position. USD and HKD are pretty tightly pegged, but USD deposit are paying 1% more then deposit in HKD. If I'm a guy with money in HK i'm thinking: why am I keeping my money in HKD, USD is paying more and I have no currency risk because of the peg plus I might be a little warry about that whole China situation. As it turns out capital flight is actually happening and the Hong Kong monetary authority has been paying through the nose to keep the peg in place. If they raise their rates to encourage people to keep in HKD who knows what will happen to their real estate sector.

Having a long position could pay off . The bottom of the peg is a little more then half of a percent from current price but you are getting paid 1% in swap annually to chill and wait for the day that the peg snap (that might change with the fed cutting rates). If you lever that 50 to 1 you are getting paid 50% annually per year to basically chill with a guaranteed bottom 30% away and you have enormous upside if the peg snaps (think swissy a few years back but the other way around). Am I missing something? Is there a scenario where the HKD could snap up in value,?

I'm not the only one who thought about that, here is a video of Kyle Bass explaining basically the same trade. the guy predicted the subprime crisis and made a fortune on it but his performance has been pretty average since then so I wouldn't take his word as the gospel but still pretty interesting:

good thread. subscribed

welcome aboard my dude, feel free to share your ideas or comment on mine

I've been thinking over the weekend and I'm a little conflicted about my USDHKD idea. On one hand, free money, but on the other, their ain't no such thing as a free lunch. The main danger is that to make any relevant money with this trade significant leverage must be used and time must pass. If I'm wrong and all is fine in HK land the peg could snap the other way around which would mean I would be on the hook for a ton of money. Unlikely, but possible nevertheless. I imagine that for this scenario to materialize either HK rates would have to rise significantly or US rates would have to drop (maybe at the same time). Both case could revert the flow of money to HK increasing the demand for HKD. At this point the question is can I collect the swap but also figure out if the winds are shifting direction before its too late.

I think so. The hong kong monetary authority is keeping it pretty tight when it comes to its market operation. They are publishing everyday their market activites. For every 7.8 HKD in the monetary base there must be 1 USD, if the rate is 7.85 they will start selling their USD reserve (which is what we want), if its at 7.75 they will issue debt to buy USD. By monitoring the HKMA balance sheet and foreign currency purchase I think it is possible to evaluate if the peg is at risk to snap on the downside. Obviously, the big payoff is on the upside, if they somehow runout of foreign currency/assets to sell they won't be able to hold the 7.85 level.

With that being said, the peg has held for many years, timing the moment it could break is impossible. The interesting part of this trade is that, with current rates, we can get paid to wait, but that could change and if HKD rates rise above USD: we would no longer get paid to wait and it could drive the peg towards its lower band creating additional losses.

An alternative to entirely avoid the cataclysmic possibility of the peg (or swap rates) going against me would be to short HK equities highly sensitive to higher rates. At some point HK rates might have to move up to avoid money from leaving and it might affect certain corner of the market like businesses with loads of expensive real estate assets on one side of their balance sheet and debt due to be rolled over on the other side. Not sure what is the situation with shorting in HK, if I can find an ADR that fits the bill that would be great.

On a side note, it would seem that Oanda has positive carry to be long HKDUSD but apparently most broker don't. Don't know what's up with that. It does not negate the thesis but makes it a lot less practical if you can't get that swap money.

IMO a nice vid but i wouldn't trust any word that he is saying, he has too much skin in that game.
Often the math is correct, but then the exact opposite happens and your money is gone.

To play macro-events you have to have a very long breath, bigger money, and a better information-flow and it could take years before anything happens.

It's more interesting for hedge funds/banks and less attractive for daytraders.

You are correct to say that Mr Bass has vested interest in divulging his trade, he's not just doing it for our education, to break a peg you need shitloads of money to go against it. The point is more to evaluate the possibilities and see how we can profit from an unusual situation, whether he is right or wrong only time will tell. We don't have to play the macro event per say but I think it is interesting to have a backdrop from which we can trade. In this case, we have a situation were rates are somewhat diverging, the flow of money form mainland China to HK is reportedly weakening due to accrued surveillance and money from HK appears to be leaving faster then before because of the prospect of China's influence on HK getting stronger. To me, it looks like a good backdrop to start looking for shorts that could playout in a "shorter" time frame, even if the grand thesis of the peg snapping does not materialize. Like I explained, I could look at shorts of HK equities that could be sensitive to this situation. If I can find good shorts by themselves (whether it be for technical or fundamental reasons), adding the macro situation over them only add to the probability of them paying out. The theme does not need to pan out, but if it does the payoff will be way greater. It would be like entering a trade on a 5 min chart and figuring out that you can ride it out on the daily chart (small short term risk vs big long term profit).

Its hard for classical hedge fund to even swing trade because of their size, they rather sit on longer term position because it greatly reduces their transaction costs. That maybe our greatest advantage as retail guys, we are nimble, it's easier for us to get out of trades, we can lever more. Unlike a hedge fund we don't have to commit to trade ideas, we can get out and retry later if the opportunity arises. I think it is a more sensible way for the retail guy to dabble in macro plays then to just sit on your trade for half a decade.

Plus I find this stuff fascinating, I thought it would fun to make wild calls under the cover of anonymity and see what hits and what misses. I don't pretend to know if any of this will make money, i'm here to find out. It is an experiment.

But yeah, this thread won't be interesting for daytraders I suspect.

If you get it right (find any kind of asset class linked to your hypothesis) to squeeze the money out, it's always great.

I for my part have discovered/developed much more profitable ways that don't require necessarily macro inputs.

And i'm not against it at all.

I just wanted to add maybe it's better to trade Knock-Out Options (expiration: open end) if you're aiming for some major macro events.

In the worst case scenario you can only lose your initial capital, that's it.

There is only one bank (Morgan Stanley) that issued 39 derivatives (Knock-Out Calls/Puts) on USD/HKD
The leverage goes from 3.2 - 5.8

Lets say USD/HKD makes a move +10% then the Knock-Out Call

WKN: MF78WG ISIN: DE000MF78WG6 (current Leverage 5.2)
Bid - Ask
16,92 - 16,94

will rise ~ 52,44%

If the underlying rallies 20% then the Knock-Out will shoot up ~ 104,88%

Edit: had to calculate the correct % numbers, the online calc was broken.