* Implied and realised assetvolatilities are set to rise - no matter the Nov G20 outcome.
Depending on the outcome, the speed of the rise will vary. In any case, global liquidity has seen its top this time around. Global liquidity to get reduced going forward.
Im using options instead of underlying.
As usual, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.Errors and Omissions may occur.Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
25 October 2010
21 October 2010
This weekends G20 meeting = a stronger Usd.
* Big short Usd bets are about to go wrong
The FED is not going to devalue the Usd via a QE2 "shock and awe" approach, rather it will be pragmatic, based on a meeting by meeting approach with no commitments for any longer term approach. The bondbuying seems to be estimated to become about 100bn Usd at the time. This is way lower than the market has priced in.
There will be no "currencywar". China is preparing measures to reduce creditgrowth and inflation as well developing domestic demand and reduce leverage. This will require a stronger currency, higher interest rates and less bank lending, reducing credit further. It is necessary to stop the Chinese realestate market spiralling totally out of control. Or has it already? Over the last three months realestate prices in the most attractive locations have alledgedly risen by 40%! From an already very much inflated level. Anyone hearing the sound a bubble popping?
Both this weekends G20 meeting and the upcoming EU heads of state meeting the weekend after will both work in favour of a stronger Usd.
This will also have a negative effect on Gold, Copper and Oil - a few other overcrowded trades . The weaker Usd, continued strong Chinese growth, weak currency and a continued strong growth of global imbalances have been important variables driving these trades.
Well, time to take profit and reverse.
* This weekends G20 meeting
The probability for an agreement between US and China has, according to the best guesstimates out there, increased from 40% pre the Chinese rate hike to 60% post it. In either case, the signals seen so far, (with China basically handing over the printing press weapon to the US by hiking their rates and increasing their own sterilizationcost at the same time as the US has scaled back their QE approach to a pragmatic - meeting by meeting one instead of "shock and awe"), indicates there will be no "currency war" (silly name).
So, from here on, global rebalancing and deleveraging could be the name of the game. This means lower growth in the Western hemisphere and increased risk for ditto in the Eastern one.
In any case, its the right riskmanagement path and it is way better than the very high risk alternative of continued global imbalance building and then disaster - scenario.
* Assetliability ratios to go lower again - credit multipliers to drop and ditto for profitability.
We have likely seen the global liquidity peak this time around - time to review leverage set ups as implied and realised volatilities are set to rise
*Emerging markets - yet another overcrowded trade. This one is running the risk of turning the "holy grail" into "holy sxxt!"
Emerging market inflows are now back at the record levels at the end of 2007, beginning of 2008. Theres a big difference between now and then though - initial liquidity. While liquidity at the time was very good, it is the reverse now - despite the low volatility circumstances.
Once vol starts pumping up, liquidity will be nowhere to be found. In emerging markets this is normalprocedure, but there are always various levels for illiquidity and this time around such a scenario is running the risk of being the worst nightmare for naive investors and speculators.
Trust me, so far I have always been on the "right side" on any emerging market crisis, you do not want to be on the wrong side of it,,,,, This time around the exitdoor might get clogged up altogether.
Perhaps not today, or tommorrow, but the signs are building.
* Positions and positionchanges
No changes
As usual, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.Errors and Omissions may occur.Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
The FED is not going to devalue the Usd via a QE2 "shock and awe" approach, rather it will be pragmatic, based on a meeting by meeting approach with no commitments for any longer term approach. The bondbuying seems to be estimated to become about 100bn Usd at the time. This is way lower than the market has priced in.
There will be no "currencywar". China is preparing measures to reduce creditgrowth and inflation as well developing domestic demand and reduce leverage. This will require a stronger currency, higher interest rates and less bank lending, reducing credit further. It is necessary to stop the Chinese realestate market spiralling totally out of control. Or has it already? Over the last three months realestate prices in the most attractive locations have alledgedly risen by 40%! From an already very much inflated level. Anyone hearing the sound a bubble popping?
Both this weekends G20 meeting and the upcoming EU heads of state meeting the weekend after will both work in favour of a stronger Usd.
This will also have a negative effect on Gold, Copper and Oil - a few other overcrowded trades . The weaker Usd, continued strong Chinese growth, weak currency and a continued strong growth of global imbalances have been important variables driving these trades.
Well, time to take profit and reverse.
* This weekends G20 meeting
The probability for an agreement between US and China has, according to the best guesstimates out there, increased from 40% pre the Chinese rate hike to 60% post it. In either case, the signals seen so far, (with China basically handing over the printing press weapon to the US by hiking their rates and increasing their own sterilizationcost at the same time as the US has scaled back their QE approach to a pragmatic - meeting by meeting one instead of "shock and awe"), indicates there will be no "currency war" (silly name).
So, from here on, global rebalancing and deleveraging could be the name of the game. This means lower growth in the Western hemisphere and increased risk for ditto in the Eastern one.
In any case, its the right riskmanagement path and it is way better than the very high risk alternative of continued global imbalance building and then disaster - scenario.
* Assetliability ratios to go lower again - credit multipliers to drop and ditto for profitability.
We have likely seen the global liquidity peak this time around - time to review leverage set ups as implied and realised volatilities are set to rise
*Emerging markets - yet another overcrowded trade. This one is running the risk of turning the "holy grail" into "holy sxxt!"
Emerging market inflows are now back at the record levels at the end of 2007, beginning of 2008. Theres a big difference between now and then though - initial liquidity. While liquidity at the time was very good, it is the reverse now - despite the low volatility circumstances.
Once vol starts pumping up, liquidity will be nowhere to be found. In emerging markets this is normalprocedure, but there are always various levels for illiquidity and this time around such a scenario is running the risk of being the worst nightmare for naive investors and speculators.
Trust me, so far I have always been on the "right side" on any emerging market crisis, you do not want to be on the wrong side of it,,,,, This time around the exitdoor might get clogged up altogether.
Perhaps not today, or tommorrow, but the signs are building.
* Positions and positionchanges
No changes
As usual, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.Errors and Omissions may occur.Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
20 October 2010
Chinese rate hike; CNY appreciationpace to increase, US QE to decrease - and so does global liquidity
* Eye of the storm - not for much longer?
China hiking rates - positive from a macro rebalancing point of view - but not from a shortterm liquidity and global growth point of view. As Ive mentioned earlier; globalrebalancing = global deleveraging.
As the cost and volume of the Chinese currency reserves have accelerated drastically, so has the exposure and the entailing risks. The cost of sterilization is sure to increase as the humongous currencyreserves have been allowed to accumulate over time, pushing inflation higher in the process. So far, the sterilization measures have not been adequate as only part of the currencyreserves have been sterilized. As imported inflation from commodities etc has also increased, a stronger currency is just what the doctor ordered.
The cost of sterilisation will now increases with the latest rate hike, (I believe this is just the beginning ), the Chinese authorities are likely to have concluded that it is in their best interest to increase the pace of Yuan strengthening. There are obvious risks to Chinese growth in this process. The authorities will have to walk a tight rope, but I doubt they have much choice. Fingers crossed.
This also means its time for liquidity drunk market participants to sober up - fast.
* What will happen from here?
Asian currencies to continue strengthening against the USD as they get dragged along by the CNY. The Usd to strengthen against everything else.
Gold and other supercrowded commodities to suffer. This will also be a structural phenomenon and not just shortterm. See global rebalancing above for explanation.
I also have a few other very interesting trades to get into from here, but Ill save those til later.
I would like to point out that Emergingmarkets in general are also supercrowded trades and would be looking for signs these are about to reverse. Liquidity is low and will not increase on any such development,,,,,,,,
*Positions and positionchanges
-Long GLL ETF (leveraged short Gold).
-Long SOIL ETF (leveraged short Oil).
-Long SCOP ETF (Short Copper).
- Short Aud/Usd
- Took profit on short Eur/Cad
As usual, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.Errors and Omissions may occur.Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
China hiking rates - positive from a macro rebalancing point of view - but not from a shortterm liquidity and global growth point of view. As Ive mentioned earlier; globalrebalancing = global deleveraging.
As the cost and volume of the Chinese currency reserves have accelerated drastically, so has the exposure and the entailing risks. The cost of sterilization is sure to increase as the humongous currencyreserves have been allowed to accumulate over time, pushing inflation higher in the process. So far, the sterilization measures have not been adequate as only part of the currencyreserves have been sterilized. As imported inflation from commodities etc has also increased, a stronger currency is just what the doctor ordered.
The cost of sterilisation will now increases with the latest rate hike, (I believe this is just the beginning ), the Chinese authorities are likely to have concluded that it is in their best interest to increase the pace of Yuan strengthening. There are obvious risks to Chinese growth in this process. The authorities will have to walk a tight rope, but I doubt they have much choice. Fingers crossed.
This also means its time for liquidity drunk market participants to sober up - fast.
* What will happen from here?
Asian currencies to continue strengthening against the USD as they get dragged along by the CNY. The Usd to strengthen against everything else.
Gold and other supercrowded commodities to suffer. This will also be a structural phenomenon and not just shortterm. See global rebalancing above for explanation.
I also have a few other very interesting trades to get into from here, but Ill save those til later.
I would like to point out that Emergingmarkets in general are also supercrowded trades and would be looking for signs these are about to reverse. Liquidity is low and will not increase on any such development,,,,,,,,
*Positions and positionchanges
-Long GLL ETF (leveraged short Gold).
-Long SOIL ETF (leveraged short Oil).
-Long SCOP ETF (Short Copper).
- Short Aud/Usd
- Took profit on short Eur/Cad
As usual, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.Errors and Omissions may occur.Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
19 October 2010
The ECB is playing liars poker - low yields to remain.
* The ECB is playing liars poker. Jawboning about "normalisation" of the yield curve.
The audience here is supposed to be the EU commission. Sending a clear ECB message that they will NOT agree in substituting ECB monetary policy for fiscal policy in order to finance and save the PIIGS.
Meanwhile, markets have literally believed in the ECB talk, pushing yields higher.
However, as the realisation sinks in that this is just - talk, yields will come lower and so will the Eur. Besides, a stronger Eur is NOT what the eurozone needs right now. In fact, for Eurozone stability reasons, it is necessary for the Eur to weaken. A strong Eur will wreak havoc.
On top of this, this weeks ZEW and IFO numbers are likely to show a Germany topping out and turning down, which will really cause angst among politicians and policymakers. Expect some political jawboning for a weaker Eur nearterm.
* China - best and worst case scenario
Running into the G2o meeting it might be worthwhile pointing out the obvious fact that China is running a nonconvertible, semifixed currency regime, which is NOT in line with open, free markets. These facts themselves have caused severe disruptions to the world economy cet.par.
A best case scenario, both for China and the rest of the world, would be for China to let its currency float. This will infer economic global pain, a lot of it. However, letting the China bubble grow further would not only infer economic pain but could also mean a new level of armed conflicts, beyond control. You choose; rebalancing today with upfront pain, or fingers crossed with upfront pleasure for extreme pain tommorrow?
What do you choose?
Humans normally pick the latter, while riskmanagement states the former.
You decide.
In any case, we are in for some very rough and turbulent times. Rollercoasterstyle. But as any rollercoasterrider knows, its on the way down the scary stuff starts and it always ends the same way; down at the bottom where we started. Question is; where is that?
* All in all
Shortterm we are in for a pre G20 correction in assetmarkets.
Beyond that, set up for BIG trouble continues. Big questionmark is whether there will be an agreement in the near future on rebalancing or not. Without it, assetmarkets will remain positive, til we sail out into the storm again.
* Positions and positionchanges
- Short Eur/Usd, Gbp/Usd, Eur/Jpy, Eur/Cad and Gbp/Jpy since last Friday.
- Monitoring equity indicies, gold, silver, copper, steel and oil for signs of a correction lower.
As usual, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.Errors and Omissions may occur.Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
The audience here is supposed to be the EU commission. Sending a clear ECB message that they will NOT agree in substituting ECB monetary policy for fiscal policy in order to finance and save the PIIGS.
Meanwhile, markets have literally believed in the ECB talk, pushing yields higher.
However, as the realisation sinks in that this is just - talk, yields will come lower and so will the Eur. Besides, a stronger Eur is NOT what the eurozone needs right now. In fact, for Eurozone stability reasons, it is necessary for the Eur to weaken. A strong Eur will wreak havoc.
On top of this, this weeks ZEW and IFO numbers are likely to show a Germany topping out and turning down, which will really cause angst among politicians and policymakers. Expect some political jawboning for a weaker Eur nearterm.
* China - best and worst case scenario
Running into the G2o meeting it might be worthwhile pointing out the obvious fact that China is running a nonconvertible, semifixed currency regime, which is NOT in line with open, free markets. These facts themselves have caused severe disruptions to the world economy cet.par.
A best case scenario, both for China and the rest of the world, would be for China to let its currency float. This will infer economic global pain, a lot of it. However, letting the China bubble grow further would not only infer economic pain but could also mean a new level of armed conflicts, beyond control. You choose; rebalancing today with upfront pain, or fingers crossed with upfront pleasure for extreme pain tommorrow?
What do you choose?
Humans normally pick the latter, while riskmanagement states the former.
You decide.
In any case, we are in for some very rough and turbulent times. Rollercoasterstyle. But as any rollercoasterrider knows, its on the way down the scary stuff starts and it always ends the same way; down at the bottom where we started. Question is; where is that?
* All in all
Shortterm we are in for a pre G20 correction in assetmarkets.
Beyond that, set up for BIG trouble continues. Big questionmark is whether there will be an agreement in the near future on rebalancing or not. Without it, assetmarkets will remain positive, til we sail out into the storm again.
* Positions and positionchanges
- Short Eur/Usd, Gbp/Usd, Eur/Jpy, Eur/Cad and Gbp/Jpy since last Friday.
- Monitoring equity indicies, gold, silver, copper, steel and oil for signs of a correction lower.
As usual, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.Errors and Omissions may occur.Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
14 October 2010
Assetrally - Usd sinking - the eye of the storm
* Global tradeimbalances are expanding at an ever increasing pace.
As these imbalances continue to grow, the global setbackrisks are as well.
I believe we are currently in the eye of the storm.
These tensions should not be able to continue for any stretched period of time.
Why not then?
1) As the world is competing ever more fiercely for exports, the realisation that fixed or semifixed currencies are creating big domestic as well as international risks will become evident.
The Chinese argument that a stronger Renminbi will risk their economy is similar to accept an even greater sensitivity in the future as their surpluses accumulate. "When in trouble, double". Not the way to go.
2) Global fierce competition for exports will lead to trade tensions, which will lead to trade restrictions and tariffs. This will reduce global trade and hence, global GDP. The risk for armed conflicts will increase drastically. Especially as higher soft commodity prices will correlate with the weaker Usd. Noone wants risking major armed conflicts at this stage.
3) As the US currency depreciates, the risk for a suddenloss of confidence in the US currency increases, especially as the US deficits and debt continues to build and yields are close to nothing.
Should this happen, any country sitting with huge currency reserves - especially the fixed or semifixed currency regimes, China being one of them, would suffer massively. The extent of Chinese Fx reserves would mean the government would have to raise taxes or debt to compensate for the FX losses. Essentially, China would fall apart, given the extent of leverage, misallocations of investments, bank exposures to realestate markets and corporate projects and corruption. And if China falls,,,,,,, fill in the blanks please. US doesnt want it, and neither does China.
Better then to try and control this global deleveraging and rebalancing process by making a G20 agreement. Unfortunately I believe the probabaility for that is quite low since politicians only have one strategy - the ruin strategy; "when in trouble double".
Hopefully, riskappetite will adjust downwards as trade tensions increase on the back of a G20 "no deal".
Short term, I believe the market has overpriced the US QE and we will see a moderation towards QE from Bernanke tommorrow, as positioning for the G20 meeting begins. If the US softened their QE easing approach, probabilities would at least increase that China would agree to let the Renminbi appreciate at a slightly faster pace. Although a deal would still be slim, at least both parties are probabaly willing to try making one.
* Short term conclusions, outlook for the Usd, (and currently high correlated commodities);
With US QE pricing overdone, IMM positioning ditto, my expectation of increased riskaversion no matter the outcome of the G20 (G20 deal = drastically lower Eur/Usd, no deal would = further trade tensions - reduced risk appetite - lower Eur/Usd. Also, long term US interest rates would rise drastically on a deal due to China buying less US bonds as their FX reserves would grow at a slower pace. Long term US interestrates would rise much less so on a no deal. In any case, higher implied asset volatilites are to be expected.
* We are currently in the eye of the storm - enjoy it while it lasts
Have your stormgear handy.
This is the time to prepare for what's to come, while making as much as possible out of the current environment. This period should be treasured since commonsense will dictate that massive reallocations could be around the corner in order to rebalance the world economy and deleverage it. It is important to remember that rebalancing of the world economy will mean deleveraging it. That process will be very harsh indeed.
* New positions and position changes
- Stopped out of my short Eur/Usd position
- Stopped out of my short Gbp/Usd position
- Took profit on my short Eur/Jpy position
- Stopped out of my short ETF equity index positions and reversed
I will go short Eur/Usd, Eur/Jpy and Gbp/Usd pre the Ben Bernanke speech tommorrow, expecting a moderation of the QE approach in line with pre G20 positioning. I will use options in order to get cost efficient leverage and costcontrol. On top of it I expect implied volatilities to increase from here.
As usual, good luck
The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.Trading on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading and seek advice from an independent financial advisor if you have any doubts.Errors and Omissions may occur.Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice."www.todaysmacrotrading.blogspot.com" will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.© 2008 "www.todaysmacrotrading.blogspot.com:The traders blog" All Rights Reserved.
As these imbalances continue to grow, the global setbackrisks are as well.
I believe we are currently in the eye of the storm.
These tensions should not be able to continue for any stretched period of time.
Why not then?
1) As the world is competing ever more fiercely for exports, the realisation that fixed or semifixed currencies are creating big domestic as well as international risks will become evident.
The Chinese argument that a stronger Renminbi will risk their economy is similar to accept an even greater sensitivity in the future as their surpluses accumulate. "When in trouble, double". Not the way to go.
2) Global fierce competition for exports will lead to trade tensions, which will lead to trade restrictions and tariffs. This will reduce global trade and hence, global GDP. The risk for armed conflicts will increase drastically. Especially as higher soft commodity prices will correlate with the weaker Usd. Noone wants risking major armed conflicts at this stage.
3) As the US currency depreciates, the risk for a suddenloss of confidence in the US currency increases, especially as the US deficits and debt continues to build and yields are close to nothing.
Should this happen, any country sitting with huge currency reserves - especially the fixed or semifixed currency regimes, China being one of them, would suffer massively. The extent of Chinese Fx reserves would mean the government would have to raise taxes or debt to compensate for the FX losses. Essentially, China would fall apart, given the extent of leverage, misallocations of investments, bank exposures to realestate markets and corporate projects and corruption. And if China falls,,,,,,, fill in the blanks please. US doesnt want it, and neither does China.
Better then to try and control this global deleveraging and rebalancing process by making a G20 agreement. Unfortunately I believe the probabaility for that is quite low since politicians only have one strategy - the ruin strategy; "when in trouble double".
Hopefully, riskappetite will adjust downwards as trade tensions increase on the back of a G20 "no deal".
Short term, I believe the market has overpriced the US QE and we will see a moderation towards QE from Bernanke tommorrow, as positioning for the G20 meeting begins. If the US softened their QE easing approach, probabilities would at least increase that China would agree to let the Renminbi appreciate at a slightly faster pace. Although a deal would still be slim, at least both parties are probabaly willing to try making one.
* Short term conclusions, outlook for the Usd, (and currently high correlated commodities);
With US QE pricing overdone, IMM positioning ditto, my expectation of increased riskaversion no matter the outcome of the G20 (G20 deal = drastically lower Eur/Usd, no deal would = further trade tensions - reduced risk appetite - lower Eur/Usd. Also, long term US interest rates would rise drastically on a deal due to China buying less US bonds as their FX reserves would grow at a slower pace. Long term US interestrates would rise much less so on a no deal. In any case, higher implied asset volatilites are to be expected.
* We are currently in the eye of the storm - enjoy it while it lasts
Have your stormgear handy.
This is the time to prepare for what's to come, while making as much as possible out of the current environment. This period should be treasured since commonsense will dictate that massive reallocations could be around the corner in order to rebalance the world economy and deleverage it. It is important to remember that rebalancing of the world economy will mean deleveraging it. That process will be very harsh indeed.
* New positions and position changes
- Stopped out of my short Eur/Usd position
- Stopped out of my short Gbp/Usd position
- Took profit on my short Eur/Jpy position
- Stopped out of my short ETF equity index positions and reversed
I will go short Eur/Usd, Eur/Jpy and Gbp/Usd pre the Ben Bernanke speech tommorrow, expecting a moderation of the QE approach in line with pre G20 positioning. I will use options in order to get cost efficient leverage and costcontrol. On top of it I expect implied volatilities to increase from here.
As usual, good luck
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