Oil trading range still works. Is EUR heading up after the election?

Light curde is at $64.07 again. I’ll keep doing the same trade until it fails me: Buy at around $64, take profit above $67, stop lost $62.

The EUR/USD at 1.26 is interesting, but I’m not ready to trade this pair yet. I’m going to wait until after the election. With current information, my model gives upside of 1.4 downside 1.2, not good risk/reward. After the election, assuming Obama wins and he implements taxcut for the “poor” and put purssure on business to “create” domostic jobs. The downside could be much higher and make it a good trade to buy EUR short USD if EUR/USD stays at around 1.26. If you want to take some risk, buying EUR/USD now can be rewarding after the election.

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Close Oil Position. Still Short JPY

Close my Light Crude position at $67.92 for a quick profit.

Still shorting JPY. I think the yen has little upside risk. I might reduce my position if it moves to a level where risk/reward is too high…may be as low as 110 JPY/USD level.

Shorted yen too early

Strong yen just got stronger and I’m doubling up my bet and short more yen.

Yen is too strong

At 10:49PM EST, USD/JPY is trading at 96.19 and EUR/JPY at 123.16. Some say the strengthen Yen is due to carry trade unwind. Companies who borrowed yen to fund their business expansion now have to pay it back due to global economy slowing down. As yen appreciates, the cost of paying back borrowed yen goes up and slow down their payback schedule. I have no idea how much money is flowing back to yen and keep its demand high, but I do know this: when USD/JPY trade below 100, pressure mounts for for JCB to intervene. The JCB is more reluctant to intervene than it used to because of China. You can’t tell China to loosen its grip on the RMB while you actively manipulate your own currency.

I’m going to buy some USD/JPY at this level. I think carry trade unwind is overrated. Japan being an export driven economy must rely on strong export to pull them out of or keep them from falling into recession. Yen too strong is going to hurt Japan.

What did I missed?

Took a few weeks off and hell freeze over. My trading profit for the first 9 1/2 months are mostly gone in just over 3 weeks. I have 2 months to make up my lost so I can book another profitable year.

2009 is going to be the year of the Chinese. You may not agree with Chinese foreign policy, worry about human right issues in China, or hate Chinese food; but Chinese money is just as good as any other money if not better. Trading with the Chinese, and you’ll be rewarded. What the Chinese do or don’t do will have a much greater impact on the world economy today than one month ago. The Chinese financial markets are less developed compare to those of the developed countries, but China got to its current state of development faster than anyone else in history. Talents, experience, and knowledge from Hong Kong may have helped. I had a private conversation with the North America CEO of one of the state owned bank of China. It was obvious that this guy didn’t get to where he was with his own merit, and I suspect most if not all state owned institutions have executives who have no clue, I mean absolutely no idea about money, finance, or anything (think high school dropouts). Yet, the China has come so far in its economic development. From what I heard, the new generations of leaders are very impressive and they’re slowly replacing the old leaders as state owned enterprises are slowly being privatized. The current Chinese communist party leaders are a smart bunch; I’ll like to see how they will react to the financial crisis the world is facing. China is putting a lot of effort into developing its domestic consumer markets, along with huge foreign reserves; China is in the best position to weather the finance crisis. I’m going to pay more attention to economic development in China and adjust my trading accordingly.

Time to get out of dollar

What the Fed is doing simply worries me. The Fed’s job is to provide liquidity to the banking system, the oil to engine if you will. That’s fine as long as the banks who need loan put up some risk free asset like treasuries for collateral. What they’re doing now is basically accepting any kind of crap, which investors and regulators have no idea how to price, as collateral. I’d like to see my local pawnshop run like that.

Bear Stern got what basically a margin call and couldn’t cough up the extra capital. Lehman and AIG got into the same trap when their asset went down in value. The GSEs were under capitalized and regulators not only let them, but encouraged them to dig a deeper hole. What did capital hill and the Feb do to save the day? They let election year politics clouded their judgement and quick-fix-smoke-and-mirror took precedent. Now the Fed has God knows how much non-performing assets in its book and Treasury is on the hook for huge potential loss.

The US government owns so much money, the jokes aren’t even funny anymore. The Treasury department has been running a deficit for years, and there will be no surplus for the foreseeable future. Year 2008 tax revenue outlook is not encouraging. So we own a lot of money, we make less money than we spend, we’re getting a pay cut the coming years…you know how the story ends. Since we have no surplus to pay down principle, and our national debt’s interest obligation is only met by issuing more new debt; we are paying interests on interest or compound interest. That’s pretty bad, right? Yeah, it is very bad. But even with that, I was bullish on the dollar vs. euro or sterling since May when the dollar depreciated too much against all major currencies.

With recent events, my view has changed. The US government is now on the hook to own a very big sum of CDO, MBS and mortgages Fannie and Feddie couldn’t buy. These fixed-income instruments generates income stream. As long as the cash generated from interest payment is attractive, these securities will trade at high price and the US government balance sheet looks good. There are many factors affecting the attractiveness/price of these securities. The fall of financial institutions holding these securities doesn’t give me a lot of confident regarding to our ability to accurately price these kind of securities. Who would have known house price falling 15% can cause some securities backed by mortgages to trade 20 cents on the dollar? I’m pretty sure the current price is wrong and correction is going to come when the smoke is cleared and dust is settled. The question is which way the correction is going to go?

In order for Dollar to be strong, the Fed must have the will and ability to raise rate. It looks like the Feb has neither. Tax revenue is heading to a decline due partly to stock market crash, slowing economy, and we won’t see tax coming from those trouble financial institutions anytime soon. With election year politics, you won’t see any spending cut. That left only one option: borrow money. When borrowing money, the interest rate is directly related to some benchmark such as LIBOR or the Fed rate. When the Treasury issue bond, it may pay very little spread over the Fed rate if the market has huge appetite for risk-fee treasury bonds. But you won’t see a lot of buyers when the treasury bond pay less than the Fed rate. That tied the Fed’s hands; in order to borrow cheap money, they can’t raise rate without printing money.

Is there any chance the dollar may go up? Strangely, yes. If the so call toxic securities the Fed took off trouble bank’s books turned out to be pears not lemons, the Fed may end up making a huge profit. I’m not holding my breath for that. The more realistic scenario is the US economy recovers faster than expected. Until that happens, USD is a sell for me.

Crazy Week

It has been a crazy week. Trading FNM and WM with mixed results. The market simply moved too fast for me. The good news is I didn’t lost my shirt. The bad news is I spent tens of hours treading the equity market and have very little to show for. Not worth my time. I could have gone to the beach, seen a Broadway show, or gotten some much needed sleep.

I closed out all Forex positions. The USD is at a level where I hesitate to pull the trigger. I do believe USD will trade in a trading range but volatility is too high for my taste.

 

The plan for next week is to spend my time researching and wait for the market to give me an entry point for EUR/USD and JPY/USD. INTC put spread I sold is losing money big time, but I still like Intel and I’m looking to buy some INTC calls next week. My NOK call spread performed well last week, I should take some off the table. Premium of options I sold has gone up last thanks to the crazy volatility. Except for INTC all other options I sold are still out of the money, thank God.