"Forex trading could be your key to financial freedom if you could consistently earn pips and at the same time realising the power of compounding".- Harwin Poon



Aug. 8- I was able to close previous opened hedge positions in profit.

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EUR/CHF 4hr chart. Price penetrating the trendline indicates a possible full recovery of the unwinding. We have a double bottom on the chart. "If" price breach the 50 fib level (the neckline), we might see 1.6685 again. This will take days, there should be a small correction first from the current up swing.

GBP/JPY trade result

Darn! After the FOMC news announcement, It hit my stoploss first before it went to my target.

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GBP/JPY trade

I'll shift my focus away from correlated hedge for a moment, EUR/CHF is too boring to watch. I'll try this one:

Long GBP/JPY at 239.62 + 9pips spread, TP set at the upper trendline (orange line above), SL at today's lowest low minus 10 pips.

- Formed a pin bar (3rd bar from the right).
- Bounce off lower trendline.
- Bounce off 76.4 fib of August 1 low to August 2 high.
- Stoch & CCI crossed up.
- ADX bear momentum decreases.

This directional trade is for Volker account.

Straddle Result

From the straddle trade I made awhile ago. Sell stop triggered. Gained an easy yet risky 15pips from that move. Risky because 72EMA was just below the entry point and indicators are already in the oversold zone. Same reason why I didn't put a trailing stop.

Opportunity to Straddle

Aug. 7 (2:40am EST)- EUR/USD has been on a range bound mode since the market open this week, with the high at 1.3838 and low of 1.3778. Since there would be a Fed interest rate announcement later, I'm expecting a breakout from the 2 levels that I've mentioned.

An opportunity arise for a breakout straddle. Here's what I'll do:
- Set buy stop at 1.3843, 1.3858 TP with SL of 1.3775
- Set sell stop at 1.3842, 1.3758 TP with SL of 1.3842

If a few minutes before the US interest rate announcement and the price is still at the middle of the buy and sell levels, I'll cancel the orders. It should be near or passed neither orders. .... and probably will put a trailing stop (depends on indicators).

Since I have bagged $145 yesterday for Volker account, even if the straddle didn't work out, it won't hurt much.

Please be remind that this site is not a signal service provider. I'm just posting what I'm doing on my managed portfolios. Trade it at your own risk.


GBP/JPY 4h chart seems to be forming a inverted head & shoulder. Price must pass above 243.11 neckline to confirm an uptrend. Since EUR/CHF is a follower of GBP/JPY, the confirmation of the H&S formation will be also uptrend for the EUR/CHF.

EUR/CHF on the daily chart seems also forming a double bottom, but the formation is not that clear as the GBP/JPY. Price need to cross above 1.6534 neckline to confirm the formation. 1.6687 is the target if neckline broke. Bearish bias is still intact unless 1.6534 is breached.

Dow Jones healthy gains yesterday also support the above views.

Subprime is still contained

Source: Danske Bank

How bad are the problems in subprime?

Earlier this year we visited the subprime issue in the report "Research USA: Subprime mortgage market - containment or contagion?" March 30 2007.

Back then we concluded that "There is no doubt that the problems in the subprime mortgage market are serious. Potentially they could be an early warning of more widespread troubles in the credit market, with a negative macro-economic spill-over. While signs of such developments should be watched closely, we expect the problems to remain contained within the subprime sector, which has the largest share of ARMs

If this is the case, the ramifications for the rest of the economy will only be minor. Moreover, the direct impact of ARM resets and rising foreclosures will be negative - but not disruptive."

We still hold the view that the problems in the sub-prime sector will not have major macro-economic ramifications. Both from a macro-economic and a financial market perspective, the subprime market is too small to have devastating effects, as long as the problems remain contained.

Will the subprime problems remain contained?

Recently, a couple of lenders such as Countrywide and American Home Mortgage Investment, which are engaged in the Alt-A (a quality in between prime and subprime), and the prime market have reported increasing losses. This could be a first sign that problems are spreading into higher quality mortgages.

The 10-year spread for mortgage bonds has been widening sharply in the recent week and compared to early this year the spread is more than 30bp higher. No doubt this indicates that some credit general tightening has taken place in the mortgage market and that lenders now require a higher compensation for mortgage risk.

It is however still too early to conclude if this spread widening has its roots in an actual deterioration credit quality among higher quality mortgages or if it is driven mainly by rising risk aversion and uncertainty. The newest foreclosure and delinquency data from Q1 show literally no problems for FRM, which accounts for by far the largest share of the market. If problems are going to spread into the prime market it will be through the ARM loans. However, as the major bulk of loans in the prime sector are FRMs, we doubt that negative impact from deteriorating debt service for ARMs will develop into a general problem for the prime market.

What to expect from here: More turmoil - but no credit crunch

Overall we believe that some of the recent risk repricing in credit markets, and the return of volatility in a numbers of markets is of a more permanent nature. The bad news from the US subprime market and related problems attached to LBOs, CDOs, and hedge funds are likely to continue. Thus, event risk is here to stay.

On a more general level, this should be seen as a first sign that we are witnessing a shift in the overall risk assessment in financial markets. With global monetary now being normalised, it is reasonable to expect more normal risk taking in markets in the coming year or two. But the process of normalisation of markets to price risk more correctly will probably not be smooth and steady. Markets may shift back and forth between a "goldilocks" scenario and experiencing turmoil.

However, we do not believe this is the first step in a credit crunch that will have serious and longer lasting effects on the macro economy. In this sense it is unlikely that central banks, including the Fed, will react to these events by easing policy. On the contrary, we are in a phase of policy tightening, and at the heart of the current crisis is not a too tight policy, but rather a too easy policy a few years ago.

There are at least four reasons why we believe this will not develop into a credit crunch:

Firstly, we are not worried about strong contagion effects from the US subprime problems, see also the chapter above. So far there is no convincing signal of tighter household credits. The Q1 senior loan officer survey sends mixed signals about consumer credits and we have not yet seen a meaningful widening of the spread among consumer loans (note newest available data are for May). However, the picture looks somewhat different for the corporate sector where corporate bond spreads have been widening lately - especially low quality bonds. That said the spreads are not near the highs of 2003 and 2004, see chart above. This indicates that the problems should remain contained.

Secondly, Economic fundamentals remain very sound, and we detect no weakness in the underlying drivers of the US or global economy. Global economic growth is close to the strongest in 40 years. In the US there have at most been scarce signs of any slowdown in business investments, consumer demand and the labour market. Corporations across regions are still awash with cash with huge amounts of free cash flow, extremely low debt positions, and overall financing conditions that are not tight. Thus, it is clear that the current risk repricing is not a response to bad economic conditions.

In fact, looking at corporate bond spreads, these seem to be driven to a large extent by corporate expenditures out of their net cash flows. In the current situation, corporate expenditures are much too low as a percentage of corporate cash flow to fuel any significant rise in corporate bond spreads, see chart below.

Thirdly, there are no signs of dramatic pressure in the banking system, and systemic risk remains contained. Spreads on banks' subordinated debt has increased but the increase has not been bigger than in the beginning of 2005 when GM and Ford were downgraded to junk and spread is still much lower than in the period 2001-2004, see chart below. Although the implied default risk for major commercial banks has increased, it is still close to historic lows, see second chart below. These developments are consistent with the economic fundamentals as showed in the charts above.

Fourthly, Global Monetary policy is not yet tight. This is important, because monetary policy is the main engine of liquidity in the economy. Until now we have merely seen a normalisation of policy, as shown in the chart below, which compares G3 monetary policy rates with G3 nominal GDP growth. Over the past twenty years policy rates have fluctuated around nominal GDP growth.

The biggest risk to our main scenario is in our opinion a prolonged period of financial market distress without any larger economic downturn. In 1997/98 the collapse of Long Term Capital Management created a lot of worries on markets, and it even had some temporary effect on the real economy. While only temporary, the economic effects paved the way for some easing of policy. The main difference between now and then is that economic fundamentals are better now and that we are coming from a period of even stronger buildup of credit.

Another risk is that this could develop into something like the savings and loans crisis in the beginning of the 90s. The big difference between now and then is that back then the housing crisis was more a result of a slowdown in the economy. The current situation is characterised by a slowdown in the housing market, while the rest of the US economy is still going strong.

Implication to equity market

The rising risk aversion was slow to hit FX markets, but once it did, there was no mercy, resulting in marked carry underperformance. Looking ahead, the strong global economy and relatively subdued inflation should continue to provide a highly positive back-drop to risk seeking in the FX markets, and we thus expect carry to return to the driving seat in G10 FX, once markets calm down again. While the continued withdrawal of liquidity through the tightening of monetary policy around the globe is bringing the end of positive returns on carry strategies closer, we still feel that we have not reached the turning point yet. The dollar has benefited from the recent bout of risk reduction but the fundamental picture has not improved and we still expect EUR/USD to head higher, once the present correction has run its course.

Having said that, the coming weeks could well bring more of the same, as nervous markets, excessive valuations and stretched positioning leaves carry strategies vulnerable for the time being.

Should the credit crisis evolve more seriously than we currently expect, the result should be a shift in investor focus from carry to valuation. The main beneficiaries from such a move would, not surprisingly, be low-yielders JPY, SEK and CHF, while high-yielders AUD and NZD look most vulnerable at the other end of the spectrum.

The Return of Risk

Source: Danske Bank

* Over the past few weeks, risk aversion has increased on financial markets driven by the fear of deteriorating credit quality, primarily in the US mortgage market. We believe the recent turmoil is a market correction and not a prelude to a major meltdown on financial markets

* Panic in credit markets rarely lasts long, unless it is driven by macro-fundamentals. Corporate financing requirements are still too low to generate any longer-term significant widening of credit spreads. The net resulting tightening of credit should be manageable for the global economy as economic fundamentals are unusually strong and global monetary policy is broadly neutral.

* That said, the ongoing tightening of global monetary policy should eventually lead to a normalisation of the pricing of risk. It seems likely that the current events are the first steps in this normalisation and a full-blown return to the goldilocks situation of the last few years with extremely high returns and low volatility will be difficult.

* While event risk is here to stay, and financial market turmoil could continue for some more weeks, we believe that on a three- and a twelve-month horizon our financial forecasts will not be significantly affected. We expect further monetary tightening in Europe and Japan, higher global bond yields, and a narrowing of credit spreads. Furthermore we see a continuation of funding/carry trades on FX markets, moderate but positive returns on equity markets, and we expect emerging markets to remain strong.

Turmoil across the board

Credit markets have been the main driver of the development on financial markets lately as risk aversion has increased and liquidity in the credit market has plummeted due to fear of deteriorating credit quality in especially the US mortgage market. The tighter liquidity and increased risk aversion is increasingly spilling over into prices of risky assets classes in financial markets like carry currencies and emerging markets.

We believe global economic fundamentals are currently strong. That said, we also believe that the pricing of risk on a number of financial assets has not been fully appreciated by the markets over recent years. See for instance our research paper series "Awash With Cash" starting January 2005, where we analysed the effect easy liquidity conditions have on financial markets in terms of creating an environment of tightening credit spreads, falling volatility across markets, a low probability of financial distress, low bankruptcy rates, too low long bond yields and expensive assets on a global scale.

Over the past year we have seen a couple of market corrections, where risk aversion in financial markets suddenly rose (see for instance Awash With Cash 6: "A Wake up Call", where we argued that the turmoil in May last year could be the beginning of the end to easy money). These corrections have been temporary, and the central question is if the current turmoil is just another market correction. If this is the case markets will return to their previous paths, as markets are calmed by continued strong performance of the global economy, and liquidity will gradually return to the credit market.

Or is the current turmoil in credit markets an early warning sign of deteriorating economic fundamentals? If this is the case, financial markets could ultimately accelerate through financial instability and into a major credit crunch. This would be the end of easy money and favourable trends on financial markets.

The answers to these questions depend on:

* How will the housing market and ultimately the US economy perform on the back on tighter mortgage lending following the surge in losses on sub-prime mortgage lending?

* Is there a danger of a global corporate credit crunch as corporate bond spreads have widened and some banks are being forced to put committed debt on their own books when liquidity in the credit market has disappeared?

* Is there any risk of a systemic meltdown in the financial sector, with an important player collapsing because of excessive exposure to risky assets?

Below we try to answer these questions and we evaluate the implications for the different parts of the financial markets.


Our main conclusion is that this is a market correction and not the prelude to a major meltdown on financial markets. This conclusion is mainly based on:

* Global economic fundamentals remain strong and we believe the problems in the US subprime sector will remain contained although the weakness on the housing market is deeper than expected.

* It is far too early to talk about a global corporate credit crunch with real impact on corporate capital expenditure. The increase in credit spreads in an historical comparison has been modest, and monetary policy on a global scale cannot be considered tight. There is still plenty of liquidity in the global economy. Further, corporate balance sheets and cash-flow remain strong.

* As of yet there are no signs of major systemic risks in the financial sector. The increase in interbank swap-rates (risk-premium in the interbank-market has been modest), and the estimated default probability remain close to historical lows.

On the other hand, we believe it would be wrong to conclude that nothing has changed. The rating agencies have changed their opinion on some risky asset classes. Volatility in different markets has picked up, equity markets are worried, and carry/funding trades on FX markets have been affected. Overall we believe that some of the recent risk repricing is of a more permanent nature.

At a more general level, this should be taken as a first sign that we are witnessing the beginning of a shift in the overall risk assessment in financial markets, which can take quite some time before it is completed. Our belief is that this process will not be steady or smooth. In the coming months, markets could easily return to the state of "goldilocks", where risk will be as low as it has been over the past few years. However, the bottomline is that the normalisation we are seeing globally of monetary policy might eventually lead to a normalisation of risk. Focus, credit quality, stock picking, and more normal conditions are likely to gain importance in the near future. It will become more important to differentiate risk on fundamentals.

Furthermore, we believe this market correction will be somewhat prolonged and will take its lead from credit markets hopefully returning to some kind of normality in the next three months. While event risk will remain high, especially in the very short run, we do not expect these events to have any major implications for monetary policy. We still expect Bank of Japan and the ECB to raise rates in August and September, respectively. We also expect long bond yields to increase. Funding currencies like JPY and CHF will weaken, and carry currencies like AUD and NZD will strengthen. Corporate bond spreads are likely to narrow somewhat, and emerging markets will continue to be strong.

Choppy Monday

EUR/CHF went range bound the whole da y with low volatility. I manage to scalp a few bucks for the Volker account, while still on hold for the other 2 accounts.

No profits were made last week, drawdown increases a bit. If the carrys sell-off continues to worst, I might inject some personal fund to cushion the fall.

EUR/CHF 1h and 4h chart are at oversold level right at this moment, I'm hoping for a full recovery from here... so help me God.

Tuesday Good Call

Recap of tuesday's Volker account trade. I took a short hedge on the confluence of (arrow on the left) 38.2 fib, trendline and 72EMA. Closed at monday's lowest low of 1.6412.

Yesterday, high yeild bargain hunters step in and there was a good signal to go long but I wasn't at my desk, so there was a no trade. Right now, EUR/CHF is making a minor correction. I'm hoping for another rally up later tonight.