WHERE'S USDCAD GOING? WHO CARES!

I am doing a hedged trade using Options (exchange traded options on the ISE) on the USDCAD pair. I am also putting this on the ThinkorSwim "Paper Money" platform as the benefit to the students of FXOptions, so they can see how this trade is managed throughout the end of March Options Expiration. The USDCAD looks like its going to explode, either UP or DOWN. It could go up to the top of the channel and scale above 1.0350, or trace below and break the 0.9950 support all the way to 0.9755 (both PFXGlobal and DailyFX have contrasting views). So which will it be? The answer is that WE DON't CARE. We'll go short with our spot position, and long
with Call Options (CDD on thinkorswim). Note that I chose Short for our spot position, allowing us to do a COVERED PUT just in case we need to raise premiums (you can't do a Covered Call; need Saxobank for that). Upon Selling USDCAD at 1.0101, I also bought an ATM Call Option at the 101.00 strike for 1.44, giving us a "virtual stop" of 144pips. There will be adjustments to bring down the cost of the stop, but this will be described in detail in class. (In addition, Commitment of Traders data also support USDCAD losses. With Summer driving season expected to drive up Oil prices from April 08 onwards, this is logical). Would I do a similar trade on my Live TOS account? Sure, but it has to be 1.5 weeks prior to expiration. I hate paying for time premium.

See the chart below:

RETURN OF THE KING

Once the EURO was KING. A combination of strong fundamentals and a hawkish rhetoric by the ECB supported its ascent towards the "promised land" of 1.50 (vs. the US Dollar). But like most financial euphoria, this one fell short - it stalled at 1.4963, 1.4921, and 1.4953, leavings the bulls frustrated. When the Euro went down recently on concerns that the ECB would be forced to consider lowering rates in response to the Fed and BOE, the bulls literally threw in the towel. But herein lies the opportunity. For if the low of 1.4438 represented a "capitulation" of sorts, then the Euro could be on its way up. The rumours of Oil being priced in Euro's only adds fuel to the fire, and a struggling 10-year yield which cannot break out decisively of its downtrend line could lend fundamental support (A Swiss Franc swoon typically results in a uptrend for the Euro). So could it be that we're looking to hit the upper end of the triangle on the Daily Charts again (circa 1.4900)? You decide. BUY and average down.

ChiefShook

WANT EXCITEMENT? GBPCHF IS IT!

The GBPCHF remains as one of the most volatile pairs out there, rivaling the GBPJPY as the wildest pair in the wild,wild west of Forex. This makes it the perfect hedging vehicle for Covered carry trades on the GBPJPY (which can be protected to the tune of 1,500 pips). But we’ll talk on the GBPJPY on another day.

The GBPCHF is so far undergoing consolidation (see the triangle in the Charts below), presumably before breaking out again. But where to, you might ask? Although the 4 hour charts shows upside (for now), the longer term daily suspiciously points down. The short term direction might be down, as the Bank of England is expected to reduce interest rates to 5.25% while the ECB remains wary of inflation. But the Commitment of Traders show the GBPCHF breaking to the upside, with the big dogs long the Sterling and short on the Swiss Franc.

We’ll see. This pair remains a BUY on dips.

Chief Shook

RIDE ON THE AUSSIE CARRY TRADE

The Red-Hot Australian economy chugs along, oblivious to the implosion in the USA and signs of a rate reduction in the United Kingdom. Could Australia be an economy which has decoupled from the good ‘ol USA, with demand in commodities from China and India fuelling domestic growth? (Could there be hope indeed for similar commodity rich economies such as Malaysia?). As was reported by the news, “The Reserve Bank of Australia lifted official interest rates by 25 basis points to 7 percent to curb inflation in an economy which is running at full capacity: with unemployment at 30-year lows, strong consumer spending and booming house prices. Economists believe at least one more hike may be needed to cool demand and price pressures.”

This makes the Aussie an ideal candidate for the Carry Trade, ala ISOptions. The aussie has a lot of things going for it in addition to the robust domestic economy. Gold is expected to increase and breach the US$1,000 barrier, notwithstanding that it’s still some distance away from the inflation adjusted highs of US$2,000 (US$850) achieved in 1980. Will it make another bullish run (with consecutive limit-up days) in 2008, culminating in a blow-off top and island reversal like 1980? Whatever the case, gold stocks (Goldcorp, Barrick Gold, Cour de Alenes) look a good bet, as is the ETF GLD, and not to forget, the venerable Aussie dollar.

Allocating $1,000 to invest in one lot the Aussie, and the second $1,000 for a hedge (for example, the EURAUD), results in an annualized return of about 18%. That’s really cool! Call options would be used to protect your long Aussie positions as it churns out the money daily(about $0.86 per lot), and deep in the money options can provide coverage of up to 400 pips). I’ll drink to that! (The picture of the wine is of the brand Yellow Tail, featured in the best-selling business book BLUE OCEAN STRATEGY).

Chief Shook

WHERE TO NOW?

Gong Xi Fa Cai! The Year of the Rat should usher in element of water, which we really need now to temper the extreme volatility from the Year of the Pig. And what a roller coaster January has been! We’ve had our worst January since the 1960s (with the first 5 day declines matching the meltdown in the 1930s), and France’s Societe Generale suffering over US$7 billion (that’s about 3.5 billion pounds) in losses attributed to a single rogue trader. (who can blame him for taking long positions on the market? Weren’t we supposed to have January effect, by the way?). In contrast, Nick Leeson only cost Barings banks a “pittance” 800 million pounds. The Fed quickly came to the rescue, lowering interest rates by 1.25 percent in a week. But was the Fed a little bit to late to stem the tide of negativity pervading the markets? Will we have a crash this time round? (defined as a market going down by 37% and above……Amazingly, during the granddaddy of all crashes in 1932, the market went down by 86% and didn’t recover until 22 years later! I’m sure we won’t have that this time round).

The Dow has been struggling of late (not unexpected since we've rallied 1,000 pts off the lows) and hit resistance at its monthly uptrending line (which used to be support but which now functions as resistance). After being repelled at this level on Monday (4th February 2008), the Dow subsequently went down 370 points the following day the weak ISM service numbers. This number, which printed below 50, follows hot on the heels of a negative Non-Farm Payrolls number, and probably provides redemption for the analysts who have been saying that the USA is already in recession. A recession in the USA, will of course, slow down everyone else in the world and temper the demand for commodities. (I obviously don’t believe in decoupling, although the Australian economy is proving everyone wrong – this is in the next posting). The S&P meanwhile looks like its locked into a range from 1400 to 1265, with mild support at 131. If the range persists, using options for Credit Spreads look a good bet (Make sure you use PUTS on Calendars to be positive Vega and negative Gamma, should volatilities rise).
(Click in Picture to enlarge)

What’s the good news in all of this? The forex fundamentals are showing a probable near term turnaround. This means capitulation in the markets, and a quick (albeit short term) and sharp rebound to the upside. Either way, it’s time to have our guard up – because MONEY CAN AND WILL BE MADE!

P/S-I just read the Feng Shui analysis by Joey Yap during the weekend. He expects the market to go up early in the year, but to face headwinds in August. Seems like last year, doesn't it? I'm laying low, using interest to generate income, since the the Rat is not kind to Horses....

Chief Shook