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JeremyWS
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18 year old Fixed income / FX trader with 5 years experience. Specifically analysing Macro trends and specializes in swing trades. Looking at cross market divergences and relative value to effectively hedge positions.
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Macro Credit Markets
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  • Taper Trades

    Depending on where you read, the chance of Taper centres around early 2014. However the various asset classes show a very different, individual picture.

    By looking broadly at the major few asset classes we can see how to best position for the "inevitable" Taper. Throughout this we need to remember that going into the Sept 18th the market was positioned such that Tapering was expected - the market was surprised, but we can use those values as a benchmark to compare to now.

    Firstly, Gold (NYSEARCA:GLD) -

    The precious metal has been incredibly weak (spot ref, 1242) recently, down 10% since the Sep 18 no taper FOMC announcement, roughly the same loss since the first major mention in June.

    (click to enlarge)Gold price, daily / thomson reuters

    The fact that the gold price has been so depressed shows that, at least commodity traders, fear that tapering could be very soon. In fact the delay in Sept. hasn't changed much and we will still head much lower.

    US Treasuries, (TLT/IEF) -

    However, UST yields, which would broadly do the inverse of gold regarding tapering are currently 13 bps lower than Sept 18. This to me suggests that the Fixed income markets see Tapering being less likely and the direct buying of USTs and MBS from the Fed has pushedyields lower. In fact for not one instance has the US 10 year yield traded at a level seen at the Sept 18th FOMC meeting.

    (click to enlarge)US 10yr yield, daily / Thomson Reuters

    However the Belly of the curve - the US 5s have dropped in yield far more than the 10's. This is because the 10s price in a guaranteed tightening cycle where as the current 5s may just be on the edge and as such the yield has dropped much more since (I'll touch on this more later)

    The USD, (NYSEARCA:UUP) -

    Of course, after the QE program was continued in September the USD reacted poorly. But since has recovered nearly all the loses since then and is trading at around 80.64 on the Dollar index (DXY). We must remember the weighting of the constituents for the DXY as the EUR is over 50% and we saw a rate cut there, and the JPY has had further BoJ intervention (talking mainly). So we can judge that the USD as a whole is broadly a touch weaker since the FOMC, roughly to the same extent as the bond markets. US dollar Index, daily / Thomson Reuters

    When we consider these 3 asset classes combined, the so called FICC (Fixed income, currencies and commodities) we see that when we scale the chart to the Sept 18th FOMC day there is a large variance in performance as shown below

    (click to enlarge)Overlayed asset classes, hourly since Sept FOMC / Thomson Reuters

    So, How I interpret this is as followed:

    Gold is lower (on the chart it is inverted and green) since Sep 18th suggesting that Tapering is just around the corner, and as such a strong NFP will result in a December Taper.

    US Dollar index is barely changed pricing in tapering, but not as much as gold - so suggests the consensus view of January 2014 for Tapering to start

    US 5 years are much lower, suggesting the belly of the curve isn't buying into the taper idea any time soon and it has dropped off subsequently. This in my opinion would be pricing in a March or later Taper.

    So the gameplan for me going forward is that to position into December and year end would be to Short US 5's, via futs, cash, etfs etc (just get long interest rates) and to simultaneously be long gold. This would mean that if there is a surprise and we see a December taper then the losses on Gold should be less than the gains on Short USTs because of relative values at the moment. If the opposite were to occur then Gold would rally significantly and USTs would only rally a bit (therefore a hedged, well risk-adjusted profit).

    At this time, staying vigilant on the USD and being short USTs / Long gold would work well ( maybe long 1 GLD while short 2 TLT or something to this effect).

    Thanks for reading, Good luck.

    Jeremy.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: UUP, TLT, IEF, GLD, FXE, UUP, TLT, GLD
    Nov 27 10:25 AM | Link | Comment!
  • Major USD Breakout Looming?

    Even though the USD has seemingly been quite volatile over the past 5 years there has been little in terms of direction. Trading roughly between 70 and 90 on the USD index (DXY), in other words there has been no definitive trend and I see this likely to change in the not too distant future (6-12 months).

    Here we can see a chart of USD index front-month futures going back to 1986. Over-layed are bollinger bands at their generic settings, 20 and 2.

    (click to enlarge)

    As we can see, in the early 90's there was a similar sort of pattern with declining ranges in the DXY before breaking much higher, and while not fully analogous to today, it strikes a glaring resemblance.

    Another key point is to consider that the Bollinger band width has never been as numerically tight as it is today showing that volatility is declining rapidly.

    (click to enlarge)

    This and the combination of the impending apex of the triangle pattern suggests that we are due a major breakout in the DXY before next summer. When moving away from the technicals to consider the fundamentals we see that US yields are rising (US 2's breaking above 0.5% recently) and the likely (and relatively) hawkish fed we could easily make a case for the DXY to break this higher - but of course things can change!

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Sep 06 4:53 PM | Link | Comment!
  • Is It Right To Buy The AUD Now?

    The AUD (NYSEARCA:FXA) has been sold off hard and there was no surprise to this, it came from 3 main reasons

    • AUD being used as a proxy to short Emerging markets
    • China Slowing down- as a major trading partner its key
    • RBA rate cuts

    the EURAUD cross pair had the best quarter in a long time, much stronger than during the 2008 financial crisis with a move at the end of Q2 being up 15.9%

    (click to enlarge)EURAUD quarterly - Thomson Reuters Eikon

    The RBA argument can be clearly expressed through this next chart showing the AUDUSD (FXA) vs. the 1Y swaps and base rate differentials.

    (click to enlarge)AUDUSD vs. 1Y swaps vs. Base rate differential - Thomson Reuters Eikon from early May.

    This was taken pre AUD drop and explains a fundamentally clear reason as to why it had to fall. Divergences don't occur for ever and one of the underlying factors had to change, and in a world where base rates aren't going up the AUD had to fall.

    Where we stand now is that the Emerging market sell-off is slowing and we have potentially game-changing Chinese GDP readings.

    I think that even though we have a good chance of heading much, much lower down towards 0.85/0.8 we are in stall for a low volatility summer and I would recommend either shorting End of August Straddles which have an approx range of 94.50 to 87.50.

    Either getting short Volatility or getting long the AUDUSD due to lower volatility and the inverse correlation they have (due to risk tendencies for the AUD as a carry currency) would be the best play for the Summer.

    Jeremy.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FXA over the next 72 hours.

    Jul 14 10:56 PM | Link | Comment!
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