Thursday, 30 April 2009

USD/JPY Position

Have placed an order at 95.90 to unwind freeze trade taken earlier this week.
Will finese this over next few days.

Will try to update overall positions and profit tracking to date in the next few days.

Wednesday, 29 April 2009

Pissed off! NZD/JPY

I am pissed off that I did not follow my plan, and allowed myself to be swayed by short term thinking!

I bought the NZD back at 54.02 this morning and cashed out the freeze trade I foolishly took yesterday at 53.50 for a loss. I think the NZD/JPY goes a lot higher, and hedging around that view is so very short term.

Set it and wait! that should be the plan!

Tuesday, 28 April 2009

USD/JPY Position

Not happy with the moves in the USD/JPY and sold USD3m bought JPY at 95.90.
This is another freeze trade, and will reopen it when things calm down again.

NZD/JPY position

Agree with recent comments that it looks a bit dodgy and could test 50.00 again.
So have placed a stop loss at 53.50 and this may become another "freeze" trade for a while.

Monday, 27 April 2009

Here's an idea!.......discussion welcome!

A friend emailed me this:

Dear Mr. President:

Please find below my suggestion for fixing America's economy.
Instead of giving billions of dollars to companies that will squander the money on lavish parties and unearned bonuses, use the following plan.

You can call it the Patriotic Retirement Plan:

There are about 40 million people over 50 in the work force.

Pay them $1 million apiece severance for early retirement with the following stipulations:

1) They MUST retire. Forty million job openings - Unemployment fixed.

2) They MUST buy a new American CAR. Forty million cars ordered - Auto Industry fixed.

3) They MUST either buy a house or pay off their mortgage - Housing Crisis fixed.

It can't get any easier than that!

If more money is needed, have all members of Congress and their constituents pay their taxes...

Now that made me think about it!! - KT

Thursday, 23 April 2009


Bought another 1m NZD sold Yen at 54.50 thus making position long 2m NZD short JPY at an average of 56.10.

Review levels 53.00 and 60.00

Saturday, 18 April 2009

A game of two halves

Roger J Kerr, April 15th, 2009

In the clich├ęd rugby vernacular, it appears to be “a game of two halves” for the Kiwi dollar currency movements over the next 12 months. While having made impressive gains to 0.5900 from the low 0.5000’s over recent weeks there are a number of short-term forces and events that suggest the NZD/USD exchange rate will not sustain its gains and return to the low 0.5000’s.

However in the medium term to longer term (the latter part of 2009 and into 2010) against a back-drop of an improving New Zealand economy and potentially local interest rates increasing ahead in timing of other countries, the Kiwi has a far higher probability to be appreciating above 0.6000.

First Half: Bollard, English and Greenback restrict scoring opportunities

The short-term variables revolve around local interest rates/monetary policy, the USD exchange rate on global markets and the Government’s budget at the end of May.

RBNZ Governor resorted to some good old-fashioned “open mouth” monetary operations two weeks ago as he attempted to jawbone both interest rates and the NZ dollar downwards. His view was that the recent increases were inconsistent with his desirable monetary policy settings and that the economic recovery could be threatened if monetary conditions move away from the required “super-loose” position.

The verbal intervention only had a very brief impact on the NZD currency market. The Kiwi fell to 0.5600 from 0.5700 on the day, but has since returned to above 0.5800 as global investor sentiment improved and the NZD is finding some overseas investor favour.

The term swap interest rates were increasing due to one-sided fixed paying demand, as both household mortgage borrowers and large corporate borrowers rushed to secure fixed rates as they believed that the interest rate cycle has bottomed.

The RBNZ themselves caused this view about future interest rate direction by stating in their early March Monetary Policy Statement that “New Zealand’s capital markets must remain competitive”. The moneymarkets and borrowers took that to mean that our interest rates could not go too far below Australia’s as we need to still attract voluntary foreign capital inflows to fund the massive $16 billion current account deficit.

The RBNZ statements added to the volatility of interest rates and exchange rates in recent times, just at a time in the economic recession that businesses and industry sectors are crying out for stability and certainty.

The RBNZ now seem more likely to cut the OCR interest rates from 3.00% to 2.75% or 2.50% later this month. That action may cause some independent NZD selling, but the markets should have already priced this eventuality into the rate. Any RBNZ interest rate reductions in April and May will be the last. Term swap interest rates beyond three years are unlikely to fall on these last OCR adjustments downwards.

The second potential short-term negative factor for the NZD/USD rate is a stronger USD/weaker euro on global FX markets. The USD has already recovered from $1.3700 against the euro to $1.3100 as expectations mount that the European Central Bank will be forced to cut its official interest rates form the current 1.25% to zero over coming months. Lower interest rates in Europe and a closing of the differential to US interest rates should return the USD/EUR rate to $1.2500. The stronger USD should drive the kiwi to 0.5500 and below, but the NZD cross-rates to GBP, EUR, JPY and AUD are unlikely to fall - more likely to be stable to higher. The weaker euro has already lifted the NZD/EUR cross rate from 0.4000 to above 0.4400 in recent weeks.

The third factor that some believe will be negative for the Kiwi is the risk of NZ Government sovereign credit rating downgrade after the budget at the end of May. In the author’s opinion, Finance Minister Bill English will meet Standard & Poor’s expectations of controlling the size of the Government’s deficit and debt increases over coming years. It may take a suspension of annual payments to the NZ Superannuation Fund to make the numbers work, but the Government knows full well that it must avoid a credit rating downgrade at all costs. The NZ Government needs to compete against other Government debt issuers for investor support over coming years, maintaining our AAA rating is imperative to that strategy. Those currency market players short-selling the NZD going into the budget and expecting a rating downgrade will be disappointed.

The NZD/USD exchange rate is expected to hold above 0.5000 over coming months, but not trade above 0.6000.

Second Half: Forwards on top, backs find wide open spaces

Further out into late 2009/early 2010 the following factors suggest an appreciation in the NZD to above 0.6000:
  • NZ economy coming out of recession on an export-led recovery in late 2009 – earlier than Australia and other countries,
  • NZ interest rates rising later in the year, ahead of all other countries, the interest rate differential to the US moving upwards,
  • Our commodity prices continuing to stabilise over coming months,
  • Net migration inflows increasing as fewer Kiwis leave and more ex-pats return,
  • The Balance of Payments current account deficit reducing over the next 12 months from 9% of GDP to 5% as profits of foreign owned companies here reduce substantially and the trade balance moves into surplus with weaker imports and stronger exports.

Excellent commentary from Roger Kerr, his thoughts are entirely in line with mine! - KT

Wednesday, 15 April 2009


Bought 1m NZD sold Yen at 57.70.
I am starting to build a position again in the NZD/JPY.
Target is 60.00 initially. Will reassess if 56.00 is broken.

Monday, 13 April 2009

Is inflation coming?...probably...but not just yet.

This is a brilliant article from The Economist 21 March 2009:

Today’s fattened central-bank balance-sheets evoke fears of inflation. Deflation is the bigger worry

Back in 2002 Ben Bernanke, then still a Federal Reserve governor, declared that “under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” That does not mean it is easy.

On March 18th America’s inflation rate was reported at 0.2%, year on year, in February. The same day the Fed said “inflation could persist for a time” at uncomfortably low levels. Yet some economists and investors insist high inflation, even hyperinflation, is lurking in the wings. They have two sources of concern. The first is motive: the world is deleveraging, ie, trying to reduce the ratio of its debts to income. Policymakers might secretly prefer to do that through higher inflation, which lifts nominal incomes, than through the painful processes of cutting spending and retiring debt, or default. The second is captured by the Fed’s announcement that it plans to purchase $300 billion in Treasury bonds and an additional $850 billion of mortgage-related debt, bringing such purchases to $1.75 trillion in total, all paid for by printing money. It is not alone: around the world, central-bank balance-sheets have ballooned (see chart).

This is scary stuff to those who swear by Milton Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon.” But the role of the money supply in creating inflation is less obvious than monetarism suggests.

The quantity theory of money holds that the money supply, multiplied by the rate at which it circulates (called velocity), equals nominal income. Nominal income in turn is the product of real output and prices. But does money supply directly boost nominal income, or does nominal income affect velocity and the demand for money? The mechanism is murky.

Central banks control the narrowest measure of the money supply, called the monetary base—typically, currency plus the reserves that commercial banks hold with the central bank. But the relationships between the monetary base, broader monetary aggregates and nominal income is highly unstable.

Central banks have mostly given up trying to target inflation via the money supply. Instead, they study the “output gap” between total demand and the economy’s potential to supply goods and services, determined by such things as the labour force and capital stock, as well as inflation expectations. When demand exceeds supply, inflation rises. When it falls short, inflation falls, and in the extreme becomes deflation. To influence demand, the central banks move a short-term interest rate up or down by adjusting the supply of bank reserves. Changes in the policy rate ripple out to all interest rates paid by borrowers.

The financial crisis has bunged up that transmission mechanism. Risk aversion, fear of default and depleted bank capital have caused private borrowing rates to deviate sharply from policy rates. Central banks have responded by expanding loans to financial institutions, purchasing private securities and buying government debt. They have financed this growth in their assets through increased liabilities such as commercial-bank reserves, swaps with central banks and other ways of printing money.

Is this monetarism? It depends on whom you ask. The Fed calls its policy “credit easing” to emphasise that, though its policy rate is almost zero, it is using different channels to ease credit and boost spending. Even its Treasury purchases are to “improve conditions in private credit markets”. That these actions expand the money supply is secondary. Similarly, the Bank of Japan is buying stocks and may make subordinated loans to banks to boost their capital and lending capacity; the money supply is not a consideration. The Bank of England, on the other hand, calls its purchases of government and private debt “quantitative easing” and explains it in monetarist terms. It expands investors’ holdings of money, encouraging them to shift to other assets, boosting wealth and investment. It acknowledges this may not work. Indeed, merely the news that it would purchase government debt drove down long-term interest rates, just as the Fed’s announcement did, an entirely conventional stimulus to demand. The rhetoric may be different but the policies are largely the same.

If the unprecedented monetary and fiscal stimulus works, output gaps will eventually close. Then central banks will have to reverse their unconventional policies and raise interest rates. They may hesitate in the face of political pressure or an explicit decision to err on the side of inflation rather than deflation. In that case, inflation will rise.

Go forth and multiply

But for the moment deflation is a bigger threat. If the Fed’s current policies fail, fiscal policy can be employed to boost demand. There, too, the Fed has a role: it could buy the bonds needed to finance tax cuts or government spending, thereby limiting the impact on long-term rates. Such debt monetisation evokes fears of hyperinflation. But inflation would result only if monetisation boosted aggregate demand enough to exceed aggregate supply. Laurence Meyer of Macroeconomic Advisers, a consultancy, reckons America’s output gap will reach 9% of GDP by next year. To eliminate that he says the Fed would have to monetise more than $1 trillion of additional stimulus over two years, assuming standard multiplier effects.

The obstacles are primarily political, not economic. Finance ministers are averse to debt and central banks even more so to monetising it for fear of becoming a tool of the government. That aversion is usually healthy but not when deflation looms. The option should be on the table, as long as there are safeguards for the Fed’s independence. Frederic Mishkin, a former Fed governor now at Columbia University, says the important thing is that the Fed, not the Treasury, be the initiator of such purchases, and only after stating that it is consistent with price stability.

On March 15th Mr Bernanke said that the biggest risk facing the economy now is that “we don’t have the political will, we don’t have the commitment to solve this problem.” At least for the moment, it is not the Fed chief’s gumption that is lacking.

The real danger will be the lack of will, both political and financial to unwind the stimulus, both fiscal and monetary. Then we really will have inflation, possibly hyper inflation.

But that is next years, and perhaps even 2011's big story - KT

Saturday, 11 April 2009

Thoughts on the Japanese yen and my trading style

I posted this on 1 January this year, and it remains equally true today:

1 January 2008
OK, some thoughts on my trading generally and the USD/JPY.

I am long 3m USD against the Yen again, after taking positions at 103.10 and then taking counter trades (freeze trades see here) at 96.97, which I then closed out at 89.63.

Taking a profit of USD245,676.67 (@0.5800 NZD423,580.47) and leaving an unrealized loss of USD410,143.33, NZD703,504.85, at current rates of 90.70 and 0.5830. Net unrealised loss at present therefore NZD279,924.38.

But first some stuff on trading style.

I take long-term currency positions on a whole raft of factors. It is a little bit like Lonely Traders Knotty Warhol stance, see here. But he is much more detailed and technical than me. If asked I can’t really point to why I like a trade, it is really a whole range of factors, of which sometimes none of them stack up on their own.

But after more than 30 years in the markets I take great care not to get fixed on one school of thought. If I have learnt anything, it is that once I have worked out what is driving the markets, it isn’t happening anymore because others have worked it out too, and the drivers have therefore changed as a result.

So I keep shifting what matters to me, and I don’t get too hung up on any one thing, be it technicals or levels or even fundamentals, it is really a cooking pot of ideas and out of that I get a “sense” of what to do. My view if you like. I read a great deal, many newspapers, magazines, blogs, websites and my “world view” is something I tend 24/7 with great passion.

It drives my trading and it also drives my advice to my private client base. I guess I can sweep a lot of articles, given that I could actually write some of them. I guess that is why I dislike many articles out there as rubbish.

But this blog was never about giving advice to anyone. It is all about making me write stuff about my views to sort out my own mind. I really don’t care if no one reads it or many do. I rarely react to other market views, but they do go into the pot and sometimes may colour the thought process.

I am not interested in what is going on right now. That is the bulk of commentaries. I am interested in what is going to happen next, which is much harder to do, with any commentaries on that non-existent. After all, if you could do that regularly, why work anywhere, and even less, why tell anyone?

My track record over many years has been a good one. But again I don’t feel the need to justify myself…I ain’t selling anything! On this blog I have traced just the last years trading, as it has happened, and you can follow all the posts if you want or if you care, I’m not fussed either way. I rarely make a long-term loss, although I can be and have been in the crap for some months at a time over the years. Strong capital base is key!

In the past I have traded all time frames and hate day trading, although I was a currency spot trader at a bank once, didn't like it, with my style much more comfortable with long term strategic positions taken over weeks and months. This means that fundamentals will always have a higher weighting in my thinking. I generally (but not always, see rule above) have a dim view of charts as most chartists that I have met over many years have crashed and burned eventually and gone back to working for someone somewhere or left the markets entirely.

So that means that any charts used will be dailies or weeklies, and maybe an hourly to finesse adding to a position. But my basic stance is if you have decided to take a trade, and are looking for 10 cent moves then the level on the day is really small beer.

So I always take a long, long, long term view.

Anyway the Yen, and sorry if this is generalised, but I’m just not going to write a book or do detailed analysis, you can easily find that elsewhere.

In the past the Yen has generally traded strong when Japan is in recession because their exporters do so well. The golden rule has been that China and Japan make it, and the US consumer buys it. This drives demand for Yen.

They don’t import much during a recession because domestic demand is weak and so the trade flows favour a strong Yen because there are more buyers than sellers of Yen due to the trade surpluses. The capital markets tend to weaken the Yen as funds flow out, but even that has not been a given, as foreign funds have bought into Japan and these can offset the outflows on Uridashis, and the carry trades.

But over time the carry trades became huge and I was caught in the wave of repayments as these trades reversed, hence my “lock up” between 96.97 and 89.63.

Japan is in a recession, but the key difference is that so is the rest of the world, with the US consumer, the main proxy buyer of Yen absolutely stuffed, both from an asset (property and shares) and credit (ability to borrow) perspective.

I believe that the capital markets are stuffed as well, with raising funds in Yen and buying international assets much more difficult to do, and the major players, the investment banks, are either gone or shadows of their former selves. Japan Inc is the only player left.

I am comfortable at being long USD/JPY again because I think that with the US and the world slowing, the demand for Japanese (and Chinese, which sources stuff from Japan) goods globally will be abysmal and will take years to pick up to where they were, if they ever do.

If you scroll back some posts you will see the disastrous affects that the strong Yen is having on Japanese industry, with Japan now running trade deficits for the first time in many years, and production collapsing.

So with sellers of Yen outweighing buyers on the trade front, and the bulk of the carry trades repaid (buyers of Yen), what happens if funds full of cash step out from Japan again seeking a higher global yield?

The Yen must weaken.

Two more factors.

Firstly Japan Inc can buy stuff cheaply. With record lows in global shares and a strong Yen, they can buy market share at a fraction of the prices 12 months ago. Once they see that markets are stabilising (have a look at the TED spread and the VIX), then they will venture out of the fox hole again. Japan Inc are probably the only players who can actually borrow Yen in size now anyway.

Secondly the Bank of Japan. They are under huge pressure. To lower interest rates. To lend to their under pressure corporates. To weaken the Yen by intervention. To do some and all the above… and they are, with heavy pressure coming from the Finance Ministry.

The Yen will weaken in the months ahead, with my initial levels 96.00, 101.70 and then key at 104 enroute to the 120.00 area.

Then it will be overdone!

Monday, 6 April 2009

NZD/JPY Update

Took profit on all NZD/JPY positions.
Long 3m NZD short JPY at average of 54.69, closed out at 59.92 for a gain of NZD261,849.13.

I think this run is a tad overdone. It will still go higher overall, but looking to bank the gains and then will re-enter trades on a pull back lower.

Thursday, 2 April 2009


Added a further 1m NZD/JPY position at 55.00, taking the total to 3m NZD long JPY short at average of 54.69.