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July 1st, 2010-AUD Strategy General Overview and Market Review

Discussion in 'Giant #2' started by Giant #2, Jul 2, 2010.

  1. Giant #2

    Giant #2 Former Special Consultant to the FPA

    Jun 19, 2010
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    G2 Review July 2, 2010

    Please read the first post to understand the context of this note. As forecast, risk aversion has taken a run at the market. As these posts are new to FPA, we had warned of the coming market correction since signs of weakness in April.

    Use of Margin and Risk Overview when trading AUDUSD and AUDJPY:

    The use of margin/leverage is not in the framework of our managed funds risk model when trading currency pairs with narrow yield spreads. When trading audusd (current) or audjpy we require a yield spread of at least 3%+ and we will use a maximum of 3:1 leverage on a scaling basis when the trading price is at 95% of estimated fair value or lower. In other words, if you have $10,000 in cash in an account and audusd estimated fair value (FV) is audusd .8500 X 95% = .8075, at which point the total position size can become leveraged to a maximum of $30,000 (rarely used) total position size. The positions are built in stages and treated separately from one another. We leverage modestly at levels near 90% of FV, because price may move much lower on the volatile aud crosses.

    The yield (min 3% pa) received daily at rollover builds cushion into the risk profile. Our 10 years plus experience with this pair has shown us that price returns to floating FV as markets seek yield during cycles of risk appetite/global growth/market stability.

    In summary, we build audusd and audjpy positions in tranches and rarely use leverage. As a fund, we are sensitive to the volatility of the pair and attraction to yield after heavy sell offs.

    We are focusing on our audusd and audjpy strategies. At this stage of the cycle, we will only accumulate audusd’s below .8500 or lower and hold to levels at .8650 or lower. We prefer level’s nearer .8000 as it is anticipated more sharp turns of risk aversion and levels below .8000 are expected in the coming months. We’re only taking new positions below audjpy 75.00, at present. Maybe a few day trades if prices move and hold above estimated levels.

    Ahead of payrolls we are holding some long audusd and audjpy’s that we have accumulated this week anticipating neutral to higher levels for the interim, but selling is likely to resume.

    See Chart

    Market Overview – Today

    Thin summer markets and a US stars and stripes holiday may cause exceptional movement in fx markets. We anticipate neutral to higher US equities following payrolls, which will help risk currencies. EURUSD bounced 1.70% on Thursday, because the euro has successfully navigated through several risk events while US economic data has disappointed. This is not to say that Eurozone growth issues have gone away. Rather, it seems as if investors braced for the worst from the Eurozone risk events are now relieved that the worst didn't come to pass. We remain negative on the euro and still look for selling opportunities. We also see a lower USDJPY in the near term as the yen, like other safe-haven currencies, stands to benefit from emerging US concerns. JPY currently has yield advantage over USD, which is why it is maintaining strength over the cross.

    Several Eurozone event risks passed largely without incident. Month-end brought the removal of Greek bonds from major sovereign bond indexes used as benchmarks by investment managers because the recent Moody's downgrade pushed their average rating below investment grade. We also saw relatively successful Spanish and French bond auctions of EUR 3.5bn and EUR 7.5bn, respectively. European institutions took less than expected from the ECB's fully allotted tender auctions, which alleviated liquidity concerns as investors wondered how institutions would react to the expiration of 12-month long-term refinancing operations.

    Eurozone peripheral 10y spreads over German 10ys have tightened slightly as the events passed, which supported the euro. And with the concurrent disappointments on the US economic data front, the US-Europe 2y government yield differential has turned in favour of a higher EURUSD at the current juncture. Nonfarm payrolls are up next in the US and we are looking for +100k on private payrolls and -150k on the headline print. And after what we saw on Thursday, any disappointment in the labour data could push the yield differential further into the Eurozone's favor.

    Good Luck with your trading and Be Careful Out There

    Attached Files:

  2. willow

    willow Recruit

    Oct 31, 2009
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    Thank you very much. :)
  3. evroom1

    evroom1 Private

    Nov 18, 2009
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    Well done

  4. dkami

    dkami Sergeant

    Apr 13, 2010
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    Thanks Giant#2 for sharing i do look forward for your next post just one ? when are we going to see good news coming out of U.S. and Euro zone it is looking sad when market goes up on softer but still bad news
  5. yurps

    yurps Private

    Dec 10, 2007
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    Fair Value

    How do you calculate or where do you find what 'FAir Value' (FV) is for the AUDUSD?

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