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Brad Bechtel is the Head of Sales and a Managing Director at Faros Trading, LLC. Mr. Bechtel joined Faros Trading with over 15 years of experience in the financial services industry and capital markets. Most recently, Mr. Bechtel was a Vice President in Foreign Exchange Sales at Goldman Sachs,... More
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  • Faros Morning Update - Euroland, California and the China Wildcard
     Euroland, California and the China Wildcard

    Relatively quiet session overnight as we heard about short term guys reducing risk coming into the weekend.  China surprised some in the market when they hiked the RRR by 50bps around 5:30am NY time.  The China Securities Journal had surmised that a move would be imminent around Friday in an article earlier in the week.  The RRR does little to address food and energy inflation which local press is making out to be a huge issue in China currently and as such, it would not surprise us if China hiked the interest rate over the weekend or in the near future.  The RRR hike was initially misread by Reuters as an actual rate hike and that caused a downdraft in risk before it was corrected.

     

    As we discussed the past 2 sessions we feel the EUR/USD may have found its bottom when it touched the 2 standard deviation lower band of the regressed mean of the EUR/USD up move since China went back to flexibility.  Since our call we have seen Citi Tech come out with a long EUR/USD position with a stop at 1.3550 and we have seen another prominent tech stop out of their short EUR/USD position.  Price action saw EUR/USD rally as high as 1.3732 after 1.3606 the low and we are 1.3717 now.  EU sources have indicated a package for Ireland would be announced next week and will likely be a combination of a bank package and sovereign package with the sovereign package potentially funding Ireland through 2013.  The disappointment around the California RANs auction this week is highlighting the trouble in US munis and may draw help draw attention away from the EUR in the short term as well. 

     

    In Asia, we saw short covering in USD vs. NJA currencies after initially opening at the lows.  USD/KRW rallyied up to 1133 after opening down at 1128, USD/MYR finished around 3.1185 after 3.1130 the low while USD/SGD tested 1.2940 after 1.2990 the high and trades 1.2960 now. 

     

    USD/JPY traded up through 83.60 briefly before running into real money sellers throughout the Asian session which took the pair down to 83.14 and we are 83.31 now.  EUR/JPY trades

    through 114.20 now after a roller coaster ride which saw us drift to 113.50 area. 

     

    USD/CHF sharply lower on the back of the move higher in EUR/USD and we see 0.9900 trading now after 0.9960 the Asian open and we did touch 1.000 briefly yesterday.   A break of 0.9850 opens a move to 0.9787 the 50 day.  EUR/CHF remains elevated with 1.3578 trading and has been resilient throughout the turbulence of the past couple of weeks.

     

    GBP/USD rallied sharply yet again as EUR/GBP tests the 200 day at 0.8563.  The 50 day is through the 200 day to the upside and a break here opens a move to 0.8630 in the short term. 

     

    European EM trading very well this morning with PLN, TRY and HUF all rallying against the USD and we continue to test the 50 days in each of those pairs.  Technicians will look for a break back through here to confirm the resumption of the downtrend in USD/TRY, USD/PLN and USD/HUF. 

     

    USD/ZAR in a similar technical position as the central European EM currencies with the 50 day here at 6.9575 providing some support and 6.9675 trading currently.

     

    In Latam, there is uncertainty surrounding the retention of Meirelles in the Central Bank.  A local article indicating that if he were to stay that he wants total autonomy over the central bank.  This would be viewed as a positive for markets given his credit worthiness in this circle.  If Meirelles does not accept the position it will likely go to Tombini who is a career employee of the Central bank but is viewed as more easily influenced by political winds of change.  Also, late in the day yesterday there was reports of mad cow locally.  USD/BRL is testing the recent resistance line at 1.7150 after trading down through 1.7100 briefly at the open.

     

    Good Luck



    Disclosure: no positions
    Nov 19 7:51 AM | Link | Comment!
  • Faros Morning Update - The Future Looks Bright for the EUR/USD Less so for the USD
     The Future Looks Bright for the EUR/USD Less so for the USD

    Today, markets will likely talk about the EUR/USD rally as a retracement of a broader downmove.  We see today’s bounce as the completion of a retracement related to a broader up move. One tool we use to assess this turn is the chart attached below.  The chart of the mean regression of the EUR/USD up move since China flexibility was re-introduced.  Tuesday’s low touched the 2nd standard deviation mark of that regression and marked a potential turning point.  Indeed, we witnessed a wall of buying of the EUR/USD by Asian Central Banks at that level.  This mirrored what we witness back in August before the EUR/USD went on its extended march through 1.4200.  Back then the EUR/USD had completed its retracement within a broader up move, right at that 2nd standard deviation level.  Prepare now for a broader EUR/USD up move. 

     

    Overnight comments in China focused on the heavy increase in food price inflation in the mainland.  A situation that historically causes massive social unrest and is one of the top concerns of Chinese politicians.  A UN report was also released citing the same concerns.  PBoC Zhou was on the tapes saying that a stronger CNY can ease inflation.  Our feeling is that they will likely use all tools available including, RRR hikes, interest rate hikes, currency appreciation and price controls.  Indeed the state council meeting yesterday reinforced price controls as one of their primary tools.  We have attached a chart below indicating that last time they had this rampant inflation in China was in 2007 / 2008 and in that period they allowed the CNY to strengthen at a more rapid rate while increasing interest rates.  This also led to DXY lower and EUR/USD higher, (chart attached).  Reinforces our argument for EUR/USD to enter another rally stage.

     

    Markets rallied despite the concerns in China and the announcement of a 2nd round of stress tests in the US and we saw regional equities move higher while regional FX moved higher.  USD/KRW dropped down to 1134 despite further conversation of capital controls and introduction of the concept of a tax on FX forwards that was floated out by the Korean Fin Min.  

     

    We heard of models selling USD/MYR down to 3.1225, selling USD/KRW and selling USD/PLN and USD/HUF in the London morning session.  USD/PHP found BSP bids to stop its move lower while INR was a notable underperformer throughout the bulk of the overnight session with rumors of the SKS IPO from a few weeks ago, going bust, but we managed to finish slightly lower on the day in USD/INR down to 45.23.

     

    Early in NY we are getting comments from Ireland as a package seems to be close to be announced.  Ireland is holding firm on their corporate tax rate at 12.5% in early ‘tape bombs’ but by and large the market is feeling more comfortable about stability in Ireland for the time being.  We note a massive rush out of the ‘safety’ debt countries and back into riskier debt nations with the periphery bid and bunds, US T-notes, and Gilts all getting hit pretty hard. 

     

    EUR/USD is testing 1.3650 with the DXY now down 0.5% and silver and softs off the lows from yesterday in meaningful amounts.  Oil the notable laggard.  We heard of BIS selling around 1.3650, likely for the Middle East on lower Oil prices recently.  Recent drawdowns in inventories combined with stability in Euroland for now, may lead to a short term rally in Oil.

     

    HUF, PLN, TRY, BRL, and KRW are all retesting their 50 day moving averages after having broken then in recent sessions.  These levels will act as support for now a break there opens a sharp move lower as the world re-embraces the ‘risk on’ paradigm.

     

    USD/CAD initially lagged the recovery in commodities but is back through its 50 day at 1.0191 for now.  We heard of aggressive model buying in SEK and NOK as models re-added to risk but largely avoided EUR, GBP, JPY for now. 

    Good Luck



    Disclosure: no positions
    Tags: USD, CNY, FXA, fx, currency, china
    Nov 18 7:40 AM | Link | Comment!
  • Faros Morning Update - Is This the End of the Risk Reduction?
     Is This the End of the Risk Reduction?

    We left the day with stories in the press indicating that European leaders were in the process of laying the groundwork for a bailout package for Ireland for up to 100bn EUR of financing.  As we shifted into the Asian time zone the usual stories started to surface, specifically China rate hike concerns. Local paper China Securities Journal indicated that China could raise rates for the 2nd time this year, very soon.  They cited an ‘unidentified analyst’ and also indicated that the Chinese usually raise rates on Friday’s and around the 20th of the month.  Seems like speculation more than anything else but that does not rule out the possibility that it could actually happen.  With Local press now discussing in addition to the rumor mill and sell side economists maybe there is some truth to the story.  The Fed tried helping risk assets with Evans on the tapes saying “$600bn is a good place to start” and Rosengren “would need to consider more action if economy weakens”. 

     

    Markets were generally quiet and flows were on the lighter side with many local markets closed for Muslim holidays this week.  The ‘risk on’ bid was short lived as USD/KRW stops were triggered thru 1140 which triggered another round USD vs NJA buying with 1144 area the high in USD/KRW and 3.1570 paid in 1m USD/MYR.  USD/CNY fixing 49 pips higher at 6.6490 did not help matters.  China could let the FX do the tightening for them, but now that they have ratcheted up the daily fixing the past few days, the risk of an interest rate tightening is higher.  USD/TWD also suffered in the stop fest and was pushed above 30.45 in spot. 

     

    USD/JPY continues to confirm its break higher as we heard of Middle East buyers in USD/JPY in Asia and we think the 100 day at 84.43 is achievable in the short term.  Middle East have been buyers of USD/JPY when Oil falls and buyers of EUR/USD when Oil rises.  EUR/JPY’s struggle to form a base here is still ongoing and support ahead of 111.77 is key to that fight.  We still like it higher in the short term with 115.52 a target to watch, the 200 day moving average. 

    Irish debt issues continue to plague the headlines and the noise has calmed down somewhat with the announcement of a potential package.  LCH clearnet, which clears a portion of European cash bonds raised the margin requirement from 15% to 30% on Irish debt while holding Portuguese debt unch.  Bottom line is we’ll get some concrete package and assurances soon, question is, does the radar turn to California or to Portugal/Italy/Spain?  Also, as Doug pointed out yesterday, the retracement in EUR/USD from the recent highs has been around 5.5% after a 12.5% move higher roughly.  That exactly matches the up move in % terms and the subsequent retracement in % terms of the Jun-Sep EUR/USD price action.  Bottom line is EUR/USD may try to form a base here.

     

    UK’s Osborne caught GBP/USD holders off guard yesterday when he indicated Irish stability was in the UK’s interest.  Highlighting the exposure that the UK has socially and financially.  GBP/USD has stalled right on the 50 day at 1.5840 which is acting as support for now.  EUR/GBP also holding above the 100 day at 0.8462 for now. 

     

    The technicals in Emerging Europe look awful for holders of EM currency with USD/TRY, USD/PLN and USD/HUF all convincingly through the 50 day moving averages and approaching their 100 day and 200 days.  However, the 100 day is still through the 200 day to the downside which is bullish for those currencies.  Nonetheless, until the European situation stabilizes those markets are vulnerable.  Turkey out on holiday does not help liquidity.

     

    In Latam, USD/CLP is rising this morning despite a hike in rates yesterday evening and continued pressure in Copper is taking its toll there and we are 486.50 last vs 485.75 open.

     

    USD/BRL running into trouble on its rally to the 100 day at 1.7330 and we’ll see if it can sustain a break there.  

     

    Good Luck



    Disclosure: no positions
    Nov 17 7:56 AM | Link | Comment!
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