Reminiscences of A Forex Speculator

Heya Tact1cal,

Indeed it looks like the SNB are going to pit themselves against the most dangerous entities of the financial world...should make for an interesting Q3. I'm structuring a trade around this:

The idea is to fade rallies to 1.2180/00, to try to build a short position for when the peg is dismantled. With the recent Greek jitters enveloping the marketplace, EUR/CHF has began to fall slightly to the peg levels. I know there are stops just underneath to ~1.1975, followed by the DNT's at 1.19/1.18. I'm thinking that without a new development in the Greek Saga, EUR/CHF may not be able to mow through both the protective peg bids and the protective barrier bids on the first go, without intervention happening soon after, as the SNB tries to maintain the credibility of their intervention. I'm looking for a trade similar to the one I took with the BoJ should these levels be breached. It will be interesting to see how much firepower the SNB are willing to commit to defending this peg. Hopefully it will allow the pairing to reach the top of the range, so I can begin building up my short positions.

On the EUR/USD front, my bearish bias remains in-tact, and I've been making some high-leverage, short-term trades in an effort to grow and compound my account. The objectives for my money management have changed, favoring more short-term, high-leverage plays as opposed to the medium-term, lower-leverage plays I've been making previously. I have limit sells at the 1.3740ish level, with a downside target of 1.35. I will be looking to make a short play on EUR/JPY as well, when it begins to test the 105 level.

I still have my limit buys at 75 and 76 in USD/JPY in case the pairing decides to drop..I'd love to pick it up. I'm also thinking of placing some orders above 78.10 in-case something comes out of the G7 meeting over the weekend.

I believe that's about all on the agenda for now.

Regards,
xXTrizzleXx

With no earth-shattering news from the G7 to 'stabilise' markets I would expect the trends from this week to carry over to the next one. The situation in Greece will once again be in focus, especially with Troika in town once again. I would expect to see the euro weaken to at least 1.35 against the dollar, possibly even breaking that level. Against the yen I would expect to see further weakness - the euro broke a 10 year low against the yen on Friday and with no positive news in sight a push below 105 is very likely. I haven't got the slightest clue about barriers or plain options on the pair, but if 105 gives away the next logical target would be 100. With large one-sided moves like we've seen take place there is always the possibility of a nasty short-squeeze, this could either be news related or purely technical (this means using tight stops and being on the lookout for a bargain).

The week ahead, from Danske:

USD

1. The main mover in the US next week is retail sales. July‟s report surprised to the upside but it is uncertain how consumers responded in August following the financial turmoil.
2. Other indicators of interest will be the regional business surveys Philly Fed and Empire index and CPI inflation. Especially the regional surveys will be interesting as for example Philly Fed was very weak last month.

EUR

1. In the euro area focus will once again centre on Greece in the coming week as the Troika (ECB, IMF and EC) will return to Greece and continue the work on the fifth review.
2. At the end of the week there are informal Eurogroup and Ecofin meetings. There is no official agenda, but the ratification of the second bailout for Greece and the adoption of the new functions of the EFSF will be a theme.
3. We expect the ECB to continue the buying of peripherals until the EFSF changes, which will enable purchases in the secondary market, has been ratified by member states.
4. e. We expect a strong reading of euro area industrial production of 1.3% m/m in July following the very strong German number released this week. Details on the euro area inflation numbers will also attract attention. We expect core inflation to rebound to 1.4% y/y in August from 1.2% in July.

GBP

1. Discouraged consumers are the main problem in the UK and it‟s doubtful whether more QE will improve consumer confidence. (Danske doesn't expect the BOE to provide more monetary stimulus, see their BoE preview for more).

CHF

1. In Switzerland the focus of attention on Thursday is likely to be the SNB Q3 monetary policy meeting. After the SNB last Tuesday introduced a 1.20 floor below EUR/CHF and intervened to weaken the franc it will be interesting to see if the SNB elaborates on its decision.

Asia

1. In Asia we have an extremely light calendar next week with no major releases scheduled.

In terms of news-flow I haven't seen such a busy end of week in a while. This is also reflected in the amount of links in my next post.

---JAPAN---

The headlines have been confusing on the yen and G7. It seems to me that nothing has changed. The only thing that is clear is that the G7 will not help Japan intervene. This, however, does leave open the option of unilateral intervention.

G-7 Signaled Japan Should Get Support for Selling Yen, OECD’s Tamaki Says

Japan FinMin Azumi: Will tell G7 that Japan to take decisive steps against excessive forex moves

G7 to Japan: You’re on your own


Euro seen under pressure on lack of G7 support
Japan's finance minister, Jun Azumi, said he met with little resistance to further intervention at the G7 meeting. Japan last intervened in the currency market on Aug. 4 to topple the yen from a record high against the dollar.

From Danske's Weekly Focus (page 6): Asia: BoJ not yet ready to take aggressive lead from SNB:
There had been some speculation that BoJ might follow in the steps of SNB earlier in the week and announce some aggressive measures to stem the appreciation of JPY. However, it should be remembered that there are important differences between Japan and Switzerland. Japan has been hit less severely by the appreciation of its currency and unlike SNB, Japan is not actively pursuing a weaker currency. Its purpose is mainly to avoid further appreciation of JPY, although a weaker currency would be welcome of course. However, just as in Switzerland, monetary policy in Japan is increasingly driven by exchange rate considerations and further appreciation of JPY is poised to be met by further intervention in the FX market and more QE. BoJ will be willing to be more aggressive, but any specific targets for the exchange rate as SNB has introduced are out of the question.

---VARIA---

China’s Imports, Exports Top Expectations

Hedge Funds Plot Assault on Swiss Franc Ceiling

Australia says won't intervene to weaken currency

Australia will not follow Japan and Switzerland in intervening in foreign exchange markets to weaken its currency even though the Australian dollar's strength is hurting the manufacturing sector, Trade Minister Craig Emerson said in an interview on Friday."We're not a country that seeks to fix the dollar, and we won't be doing that."

Specs sharply pare bets against dlr latest wk-CFTC
NEW YORK, Sept 9 (Reuters) - Currency speculators sharply
decreased bets against the U.S. dollar in the latest week,
according to data from the Commodity Futures Trading Commission released on Friday. The value of the dollar's net short position fell to $3.94 billion in the week ended Sept. 6, from $14.62 billion a week earlier. /.../
Speculators cut long bets in the Japanese yen and Swiss
franc in the latest week. They also sharply increased bets
against the euro, with a net short position of 36,443 contracts
from 384 contracts the previous week, the CFTC data showe

---EUROPE---

13 Ways The Euro Can Implode
Europe is very vulnerable at the moment, obviously.

Brussels: 'No one can leave the euro'
In 2009, the European Central Bank produced a legal working paper examining the legal issues surrounding euro and EU exit.It concluded that euro exit is only possible upon exit from the union as a whole.
"A member state’s exit from European monetary union [EMU], without a parallel withdrawal from the EU would be legally impossible," the paper said regarding a country deciding to exit itself.

French banks braced for credit-rating downgrade - sources

From Danske: ECB meeting: Trichet on hold

However, he emphasises that there are downside risks to the new downbeat Eurosystem staff GDP forecast and in the Q&A he said that “the main message is uncertainty” and that the “situation is extremely demanding”. We see this as a signal that if the economic outlook deteriorates further a rate cut could become a possibility. We expect in the
coming months to see the first signs of a mid-cycle slump coming to an end and thus the case for interest rate cuts will not materialise. Looking forward, we expect that euro area growth will be modest for an extended period, but remain in positive territory. In any case, Trichet will not be very eager to end his term with a U-turn on rates (a repeat of 2008) and Mario Draghi would prefer not to start out as a dove. But of course, if the euro
area is clearly heading for recession and a rate cut is justified, the ECB will deliver. But for now keep in mind that the ECB considers 1.5% as a very low level for the refinancing rate and would prefer not to use the last ammunition unless absolutely necessary.

The ECB inflation outlook was broadly unchanged. Staff projections forecast annual HICP inflation in the range of 2.5% and 2.7% for 2011 and of 1.2% and 2.2% for 2012. This was unchanged for 2011, while the range for 2012 is slightly narrower and definitely in the low end compared with our projection. Trichet underlined that the risks to the medium-term outlook for price developments are broadly balanced, changing the wording from previously upside risk.

Germany Said to Ready Plan to Help Banks If Greece Defaults

Chancellor Angela Merkel’s government is preparing plans to shore up German banks in the event that Greece fails to meet the terms of its aid package and defaults, three coalition officials said. Greece is “on a knife’s edge,” German Finance Minister Wolfgang Schaeuble told lawmakers at a closed-door meeting in Berlin on Sept. 7, a report in parliament’s bulletin showed yesterday. If the government can’t meet the aid terms, “it’s up to Greece to figure out how to get financing without the euro zone’s help,” he later said in a speech to parliament.

Schaeuble travelled to a meeting of central bankers and finance ministers from the Group of Seven nations in Marseille, France, today as they face calls to boost growth amid increasing threats from Europe’s debt crisis and a slowing global recovery.

German Econ Minister says Greek default not taboo

"To stabilise the euro, there can no longer be any taboos. That includes, if necessary, an orderly bankruptcy of Greece if the necessary instruments are available," Philipp Roesler wrote in an article for Die Welt daily.

Greece Must Keep Cutting Its Budget or ‘Probably’ Exit Euro, Flaherty Says

“It’s necessary for the Greek government to stay the course,” Flaherty told reporters in Marseille, France, where he is attending a meeting of Group of Seven officials. “The alternative is probably that they leave the euro. I expect the Greek government would want to continue their fiscal consolidation.”

Stop rejoicing. This was no victory for the eurozone
Wolfgang Münchau on what the German Constitutional Court's decision really means.

Ireland
Good news from Ireland: In addition to falling bond yields, Irish budget deficit forecast for 2012 was revised down. Also crossing the wires is news that Ireland is planning to return to the bond market (using syndicated loans at the start, though) as soon as the second half of 2012. However, the Irish still have a long road ahead of them with bank restructuring still the main issue. All in all, though, Ireland is very different from Greece and lest something goes terribly wrong in the banking sector, we should expect to see a robust recovery.

Even more stuff for the economic calendar: September Roadmap for the Euro Crisis

Sweet calendar bug.

I knew hedge funds would be on this one. The SNB may have bitten off more than they can chew. Hedge funds want their money and on top of that investment banks are holding their options. That's mean money right there.

Nice game plan. I agree that we won't be breaking these barriers without a something grim happening. I'm going to be looking for a tight long(short term) if we get close enough to 1.2 without anything serious going on. I'll definitely be wanting to short on the interest of hedge funds/banks looking to make the SNB feel some pain. The threat of additional intervention means I'll be very cautious with my shorts. I definitely don't want to short below 1.2100. I want to give myself a lot of breathing room to cut a trade. There's no way In hell I'm going to let myself get slipped on a stop loss if I can prevent it.

Personally I remain very skeptical of the hedge funds. If the Swiss are really serious about the floor under the euro then they might spook away non-leveraged funds big time. If European depositors who've been fleeing their own banks suddenly find there is no protection in francs they might withdraw their funds and buy something else instead (don't ask me what, I've got no idea). I certainly wouldn't be putting my money into francs right now because the way I see it there is no way the Swiss can be serious about the floor and not drive their economy into a ditch at the same time. The Swiss tied flooring the franc in 73 and 78, it worked but it resulted in very high inflation. With the SNB printing new francs into existence in exchange for euros daily now I cannot see why anyone would want to buy francs. I can see the potential in pushing the SNB to defend the 'Maginot Line' at around 1.20 and making some nice coin out of a subsequent rally, but I don't see the SNB giving up.

Bear in mind that the Swiss have already given up control over the size of SNB's balance sheet (that's what buying unlimited amounts of euros does to your balance sheet if you're a CB) and the only thing to measure the SNB's success by is the EURCHF exchange rate. They have doubled down and put everything on '0'.

PS. The current head of the SNB was educated in the US and worked for a hedge fund while in New York. This means he is aware of the hedge funds' strategies and tools and provides him with the knowledge and capabilities to counter them. I believe this is one of the reasons the SNB is actively selling volatility.

PS2.
As for the euro selling pressure, my charts tell me the selling is now taking place on EURJPY and EURUSD (maybe exotics as well, but I don't keep an eye on them).

Trizzle how did the USD/INR trade play out. The domestic situation here has been bad.

Heya guys,

It's been a while since I've updated the journal, so thought I'd stop by for a quick peep. School has really began to take it's toll on me, and I've had a complete overhaul of my program from Physiology to Mathematics. As an added plus, it allows me to take some Economics courses this year. Today we discussed Operation Twist and the importance of economic expectations - music to my ears! I also discovered the recent tidbit that I was born on the day that The Bank of England was broken (Sept. 16th, 1992) and celebrated my birthday last weekend.

Reading the articles you've posted bug, it would seem as if G7 has no explicit reservations about unilateral intervention from the BoJ. With a new Fin Min yet to gain credibility from his verbal intervention, as well as the Japanese fiscal year ending, I've been looking at the recent risk aversion as a chance to get into som long USD/JPY positions, just in case they decide to pull the trigger. I have a long position at 76.30 which was hit yesterday, and two more at 76.00 and 75.00 - the former of which I'm hoping would be hit as well.

On the Euro front, I'm thinking that we will see Greece once again kick the proverbial can down the road, but the real challenge I see is how it will go about implementing this latest set of reforms so that it can meet it's targets when the Troika comes around again. Upon receiving news of the bailout being dispersed, I'm thinking we should see a short-lived relief rally, which may be capped at ~1.3950/1.4000, as I have great difficulty in seeing the single currency above that level. Besides political headline risks, we also have the ECB's monetary stance as a potential market mover in the coming weeks. Further reiteration about diminishing growth prospects by Trichet on his way out may depress the single currency further, but the icing on the cake will be if the incoming ECB President Mario Draghi cannot hike early on into his tenure - as most expect him to (as evidenced in the Danske Article and numerous others on the net)

GBP is also looking quite weak, as expectations that the BoE will increase their QE program grow, and become closer to reality, especially if inflation starts to decline. What will really trigger a large move in this pair, is if more members of the MPC start to vote for an increase in the asset purchase program, which is currently at 8-1.

Operation Twist appears to have given the US dollar a bid, as the notions of QE3 have been dismissed from the market. I'm unsure how strong this movement into the dollar is going to be, but if it continues, it will make currencies like the AUD/USD and NZD/USD look attractive, not only from a yield perspective, but because they will also be subject to a relief rally in the near term from the disursement of the next tranche by the Troika. AUD looks like a better prospect, since there are large M&A flows to be expected in the future, and sovereign buyers are keeping somewhat of a floor near parity, which should hold some options structures. I may just decide to fade a breach of parity for what it's worth...makes me ponder a GBP/AUD short as well...hmmmm...

The SNB looks like they've had their work cut out for them with the recent rumors that they were going to raise the floor to 1.25. If they quash the market's expectations, we're very likely to re-visit the 1.20 floor, where my limit buys are lieing in wait to see what the SNB can really do.

@vicky_ag: Answered your PM

Should be all for now,
xXTrizzleXx

Nice thread. Shame it is very quiet. I will be perusing the thread some more later this week/weekend. Heavens know what other good threads are dead quiet or binned.