Position update

Policy change.
I deal with my bank and use forward exchange contracts, typically rolled out at inception for 1 year. That means I don’t really worry about day-to-day changes unless the trend itself is in danger. In the past I have shown the spot rate that I have entered deals and ignored the forward points, whether they have been a benefit or cost.

But some of these carry trades have been in place a long time, and the points are getting extremely valuable. So from now on I will show the deal at the forward rate and strip out the unearned forward points for valuation.

Here are the trades I am active in:

AUD/JPY

Long AUD 3,735,990.04 short JPY at 76.69 average.

This was originally made up of two trades:
An original deal of long USD3m short JPY @103.10 (unfrozen on 5 June 2009) and a short USD3m long AUD @ 0.8030 (yes, crossing it up with the AUD has saved me!) done on 5 June 2009, creating a cross of 82.79 average.

I have not bothered with the points on the USD/JPY leg as the interest differential was so small.

The AUD/JPY deal was rolled to 7 June 2010 at a 230 point benefit and has since been rolled again at the bank to 7 June 2011 at a 380 point benefit (as AUD interest rates have climbed over the rollovers).

So the new rate due 7 June 2011 is 76.69, but only on 7 June 2011. The unearned forward points as at today are 238 points cost, so an effective spot rate for valuation purposes of 79.07. (Are ya confused yet!)

Current spot rate: 81.35

Current: Gain 228 points

Comment:

See AUD/USD comments below.

USD/JPY:
The state of Japanese government finances remains extreme. The new government will eventually break the self-imposed debt ceiling and prompt a credit downgrade by the ratings agencies. But the weakness of the USD remains paramount at this stage, especially with QE the dominant force at the Fed. The USD/JPY will eventually test the 80.00 area, and we will see the Japanese intervene below there. I am not hopeful that they will achieve anything by intervening, but the AUD upmove itself should compensate for USD weakness.

I am happy with the current exposure, but more from a carry trade perspective, in that time works the profit out.

NZD/JPY

Long NZD 3m short JPY at average of 53.33.

The NZD/JPY deal was rolled from the last trade of 1m (making 3m in total at an average of 57.23) on 28 May 2009 to 28 May 2010 at a 160 point benefit and has since been rolled again at the bank to 27 May 2011 at a 230 point benefit (as NZD interest rates have climbed over the rollovers).

So the new rate due 27 May 2011 is 53.33, but only on 27 May 2011.
The unearned forward points as at today are 121 points cost, so an effective spot rate for valuation purposes of 54.54.

Current rate: 63.80

Current: Gain 926 points.

Comment:

See Yen comments in AUD/JPY above. See NZD/USD comments below.

I am happy with the current exposure, but more from a carry trade perspective, in that time works the profit out.

EUR/USD

Square

Current rate: 1.3690

Comment:

The ongoing concerns in Europe over debt are not going away. But I believe that it is not the problem it was back in May. The ECB can buy bonds, but at present there is a bit of brinkmanship going on. They want to teach the politicians that they have to sort out fiscal policy. Eventually the ECB will again step in so I don’t see EUR weakness as long lasting.

In the long run, all other things being equal, the Euro Zone debt position is far better than the US. If the US does not move to reduce the budget deficit over time, then the USD will become the next Greece.

I still believe that Europe will raise interest rates before the US does. Watch the inflation readings. With Gold, oil and food all hugely higher, inflation is on its way. Have look at

Standard and Poors

then expand the agriculture icon!!!!

Agriculture is up 25%, with cotton up 90%!

GBP/USD
Square
Current rate: 1.6114

Comment:
Took a loss on my short GBP1m position at 1.5278 (short from 1.4990) of USD 28,800. Took a gain (back on 11 August) on my long GBP1m position at 1.5820 (long from 1.5278) of USD 54,200. Net gain USD25,400 (NZD35,376 @0.7180).

AUD/USD

Long AUD 2m short USD at 0.7907.
Current rate: 0.9861

Current: Gain 1954 points.

The AUD/USD deal was at spot of 0.8670 on 28 September 2009. Was rolled to 28 September 2010 at a 320 point benefit and has since been rolled again at the bank to 28 September 2011 at a 443 point benefit (as AUD interest rates have climbed over the rollovers).

So the new rate due 28 September 2011 is 0.7907, but only on 28 September 2011. The unearned forward points as at today are 393 points cost, so an effective spot rate for valuation purposes of 0.8300.

Comment:

Unchanged really. I believe the Australian economy remains extremely well placed to benefit from ongoing commodity demand, especially with China still growing strongly. I expect ongoing interest rate increases from Australia. I still believe that the AUD/USD has a long way higher to go yet. My new target is now 1.0500.

Happy with the current exposure.

NZD/USD

Long NZD 2m short USD at .6745.

Current rate: 0.7730
Current : Gain 985 points.

Comment:

The NZD/USD deal was at spot of 0.7160 on 28 September 2009. Was rolled to 28 September 2010 at a 190 point benefit and has since been rolled again at the bank to 28 September 2011 at a 225 point benefit (as NZD interest rates have climbed over the rollovers).

So the new rate due 28 September 2011 is 0.6745, but only on 28 September 2011. The unearned forward points are 207 points cost, so an effective spot rate for valuation purposes of 0.6952.

The NZD/USD is still looking very positive, with commodity prices still driving the NZD higher. There is also some pressure from the Canterbury earthquake offshore flows. As the re-insurers offshore pay out on the claims they have to buy NZD’s. The sums involved are large and that is driving the NZD/EUR and NZD/GBP higher, as the re-insurers are in the UK and Europe.

The NZD/USD is still following the AUD/USD, which is driven by Asian developments. The NZD/USD has not really had the benefit of rising interest rates, but this cannot be too far away now. Inflation pressures are strong in China and Asia and we need the higher NZD to insulate us from imported inflation. When the RBNZ begins to raise interest rates in March 2011, the NZD/USD will begin to test the post float highs around 0.8250. Target remains the highs of 0.8250, but we may see the 0.9000’s before this trend finally tires.

Happy with the current exposure.

Unrealised gains NZD1,174k (AUD/JPY +134, NZD/JPY +435k, AUD/USD +404k, NZD/USD +201k).
Previous realised balance: NZD2,344,360.38

Plus GBP/USD realised gains of NZD35,376

Total gains banked since August 2007:

NZD2,379,736

So if I cashed up the whole lot right now I would have made over NZD3.5m since August 2007 or slightly over 3 years.
If you don’t believe me, scroll back through all my posts to see how I did it!!

My trading style, a repeat!

http://kiwitrader.blogspot.com/2009/06/my-trading-style-repeat.html

Ireland sneezes but little sign of globalised cold

10 Nov 2010 Jeremy Gaunt, European Investment Correspondent

LONDON (Reuters) - About six months ago, the euro zone debt crisis was hot enough to trigger headlines like "Wall Street falls on worries about Greece". It was all about contagion, fears that default in economic minnow Greece could spread not just to Portugal and Spain but beyond, crushing the euro zone in its wake. Tensions are increasing again about debt in the euro zone periphery - particularly Ireland - with some yield spreads and debt-insurance costs at record levels.

But to date there has been little sign of global contagion, primarily because investors have been looking elsewhere - mainly the Federal Reserve - and because of crisis management programmes that can now be employed by policymakers. The spread between Irish 10-year bonds and German Bunds hit a record 571 basis points on Tuesday, up from around 300 at the height of the crisis and a good 200 above where it was in mid-October.

Greece, too, is back up to uncomfortable levels, if not as wide as at the height of the crisis, and Portugal's spread has widened to a record as well. The impact further afield, however, has only been felt mildly so far, mainly on the euro, and even then only in the past day or so at a time when the dollar has been rising broadly anyway. "Markets fear of contagion has fallen," said Klaus Wiener, head of research at Generali Investments in Cologne. "In May, the escalation of the debt crisis in Greece threatened to end in a systemic crisis. This fear is not as pronounced any longer." The 30-day correlation between the movement in peripheral bond spreads and the euro was around -0.6 in May, meaning that widening in spreads was usually matched by euro weakness.

That correlation is now close to zero for Ireland and only slightly negative for Greece, suggesting that at least over the past month the debt problems have been isolated, having little if any impact on the currency. It is more or less the same story with stocks. In the past three weeks as the Irish spread has widened 200 basis points, the pan-European FTSEurofirst 300 stock index has gained more than three percent. It was up three-quarters of a percent on Tuesday as the spreads widened to another record.

Globally, stocks have paid even less attention, with MSCI's all-country world index rising around 4 percent over the period. Data from iTraxx, meanwhile, shows that investors are pricing in the chances of default in European companies as less than that for Western European sovereigns -- not good news for sovereigns but hardly a thumbs down for corporates, which suggests fear does not stretch to a systemic crisis which would surely engulf companies as well.

DIFFERENT CONDITIONS
There are two main reasons why the market impact from the renewed debt worries has been muted so far. One is simply that investors have had their minds on other things, notably the $600 billion quantitative easing programme launched by the Fed last week to stimulate the U.S. economy. The global economic picture has also improved, with even lagging U.S. jobs creation ticking up. "The big theme was quantitative easing, the economic cycle. It is undeniable that the data has been positive, almost globally," said Joost Van Leenders, investment specialist at BNP Paribas Investment Partners in Amsterdam.

The second big reason is that investors believe lessons were learnt in the earlier Greek crisis and policymakers stand ready to stop disorderly default contagion. Since June, a European stabilisation mechanism has been in place, funded by the European Union and International Monetary Fund, to provide as much as 750 billion euros at relatively low interest rates to euro zone countries needing them. No money has been taken, but it is seen by many as a safety net. There are also plans afoot to create a permanent mechanism. Although political differences will make agreement hard, the mere fact that it is under discussion underlines the willingness of authorities to act. None of this is to say that the current stresses in Ireland and elsewhere are negligible. It is inconceivable, for example, that a default or restructuring in Greece or Ireland would not have wider impact.

But the lack of sharp reaction outside the countries concerned so far does suggest investors are not expecting a blow up across markets similar to the one earlier this year.

Normal transmission has been resumed

Sorry, been away doing other stuff. Back online now!

GBP position update

Took profits on my GBP 1m long postion. This was enterered at 1.5278 and took the gain at 1.5820. So 5 pence gain, not too shabby.

Other positions unchanged, will do a position update later in the week.

Whatever happened to the euro zone crisis?

Paul Taylor, PARIS (Reuters)

What a difference a few weeks make. In early June, doomsayers were predicting the demise of the euro after a 110 billion euro ($145.2 billion) bailout for Greece and a $1 trillion financial safety net for the rest of the 16-nation single currency area failed to calm market panic.

European banks were hardly lending to each other, the euro had hit a four-year low against the dollar, and there was widespread talk that Greece would have to default on its debt. "We are assigning a higher and higher probability to a break-up of the euro zone," Gina Sanchez, director of equity and asset allocation strategy at Roubini Global Economics told a Reuters Summit on June 8. "I don't want to overstate that. It's not our base case, which is they muddle through," she said. Among the grounds she cited for a possible collapse were a lack of political will to cut budget deficits and Germany's reluctance to foot the bill for rescue packages.

Just two months later, the euro zone's crisis has eased and there are signs of a return of investor confidence. The euro has gained 10 percent against the dollar, economic recovery in the euro area is more robust than forecast although uneven, European stocks outperformed the S&P500 index of leading U.S. shares in July, and interbank lending has thawed following the publication of stress test results on European banks. A healthy crop of first half corporate earnings, including at major euro zone banks, and a positive report card on Greece from the International Monetary Fund and the European Commission have fuelled a more optimistic mood.

The risk premium investors charge to hold the debt of peripheral euro zone states such as Spain, Portugal, Italy and Ireland has shrunk to the lowest levels since April. Spain's borrowing costs tumbled in a 3-year bond auction last week and the cost of insuring Spanish and Portuguese debt against default has also tumbled on the Credit Default Swaps market. Stress tests on European banks, scorned by many analysts as too soft when only 7 banks out of 91 failed, largely did the trick by providing detailed data to show most were in reasonable health and could withstand the main sovereign risks. The European Central Bank has almost stopped purchasing euro zone weaklings' government bonds, an emergency measure initiated to stabilise the bond market at the peak of the crisis in May.

RISKS EXAGGERATED?
The speed of the reversal in sentiment raises the question of whether risks of a euro zone break-up and a rolling government debt crisis were exaggerated from the start. Undoubtedly, the euro jitters were amplified by enduring hostility to the single currency project in London -- Europe's biggest financial centre -- and scepticism in the United States. Unnerved by the European Union's fractious and convoluted policy process and by domestic resistance in Germany, markets underestimated the political will of core governments to do whatever it took to stabilise the euro area.

They also seemed to grossly overdo the financial and political fragility of Spain, which was briefly seen as the next Greece and the straw that could break the euro zone's back. So has the crisis gone away or is it just taking a summer siesta? ECB President Jean-Claude Trichet was rightly cautious when he said last week: "I do not declare victory." Money markets are improving but have not yet returned to normal, he noted. Smaller banks, notably in southern Europe, are still shut out of interbank lending as counterparties doubt their solvency.

Many other risks remain, including the possibility that as market pressure eases, governments may step back from painful but necessary bank restructuring, budget cuts and long-term economic reforms due to political and social opposition. It will take years of unpopular cost-cutting reforms of pensions, labour markets, welfare benefits and the public sector to reduce bloated budget deficits and national debt piles.

Despite its impressive progress report, Greece may yet have to restructure its massive debt, forcing bond holders to take a "haircut", many analysts believe, although this process could be postponed for 3 to 5 years due to the EU/IMF bailout. The euro zone economic recovery is likely to slow as austerity measures curb public and private demand, making it harder to reduce unemployment. Money market rates may spike as the ECB withdraws more of the ample liquidity it has pumped into the banking system.

Above all, the economic imbalances and sharp differences in competitiveness between northern European states led by Germany and Mediterranean euro zone countries remain unresolved. The export-driven German economy is powering ahead while Greece languishes in an austerity-induced recession and Spain and Portugal struggle with anaemic growth while trying to curb their budget deficits. Markets may no longer see an existential threat to the euro zone, but they see lingering problems which will make investors more wary and selective than in the currency's first decade.

Position Update

Have not changed any of my positions.

So still long NZD/USD, AUD/USD, NZD/JPY, AUD/JPY and GBP/USD.

Have some more grey hairs over all the positions, but am hanging in there at this stage.

I like the AUD and the NZD, I think they still have legs to recover back to 0.9000 and 0.7500 respectively.

I like the carry trades. But have been beaten up hard in May. The trick with carry trades is to hold on to them. They return between 4 -5 % pa. The rate has to fall that much every year to lose out. That has never happened. Some years down, some years up, but never down every year. So as long as you can afford to wait, you cannot lose. If you can wait 10 years, the rate has to fall 50% for you to be behind. So the secret is to hold them until the rate recovers again. It has worked for me many times.

I'm not so in love with being long GBP. But I think the budget will lift the GBP. So I will wait a while yet.

I also like the euro. The worst of the sovereign fears are now priced in. The fall post creation of the euro was close to 35 cents. The fall post GFC was close to 35 cents. This move started down from 1.5000, so I figure between 1.2000 and 1.1500 there will be a base found. That may have already happened.

France and Germany will make serious money over the summer months with the euro at these levels. France especially, as they are agricultural exporters and their exporter season starts now. I expect the data from these two countries to improve dramatically over the next 3-4 months.

So I like the euro, and I see it back towards the 1.4000 area by Christmas.

What else...

I don't like the USD. I don't like their debt load. I don't like the way Obama is demonising BP.
I think US politics is going to be paralysed post mid terms. So doing an austerity package a la Europe will be difficult, if not impossible.

I don't like US bonds as a result.

Thats about it. Sorry for the lack of posting, but haven't been really inspired.
Anyone missing the blonde of the month yet?