Category Archives for General

Closing A Short EUR/GBP Trade (Profitably)

Hello, Friends. On August 15, a post here suggested establishing short positions in EUR/GBP around the spot level at the time, 0.8025, with a stop above 0.8050 and an initial profit target of 0.7955. Since that was posted, the high in the pair has been 0.8027,  and the profit objective was achieved earlier today, for a gain of roughly 70 pips. Normally, the next profit objective would be the previous low, in this case 0.7873. That would represent a further gain of roughly 70 pips if and when it is reached.

Frankly, I don’t see it as being worth the bother at present. There is a lot going on in the world, and Todd and Doc have great trade suggestions in stocks, futures and options virtually every day. Given the opportunities available in those asset classes and their derivatives, it’s tough to be enthusiastic about trading currencies with realized (historical) vol levels of 4 or 5% (EUR/GBP is running around 4%), and daily ranges of around 35 pips. I think that this trade will continue to work; the question then becomes “Is this the best use to which I can put my trading capital?”

For those leveraged to the maximum of around 50:1, a trade like this might still make sense, but it seems to me that the odds of being stopped out by noise – as almost occurred in this trade on a couple of occasions – are probably unacceptably high. I spent virtually my entire career on bank currency desks, and this is about the worst stretch of subdued price action that I can recall. Given the changes occurring in the industry, some of the decline in volatility may be more or less permanent, but I suspect that the energy level, and ranges, will expand in the not too distant future. I’ll continue to look for potential setups in currency pairs; in the meantime, there are plenty of other fish jumping.

As always, very best of luck!

There’s Added Event Risk Today (Twice)

EURGBP Daily 220814

Hello, Friends. We have a couple of extra features today, in the form of potentially important, and market-moving, speeches by Fed Chair Yellen and European Central Bank President Draghi. Dr. Yellen’s speech will be delivered at a breakfast, 10 AM EST, while Dr. Draghi waits until the dessert plates are brought in, at 2:30 EST.

Both speeches will be delivered at the Jackson Hole conference, an annual event sponsored by the Kansas City Fed. It is attended by senior policy makers and economists, and has been the venue in the past for major policy statements. This year’s topic is the labor market, and since employment is believed to be a key to the Fed’s current deliberations as to when to start raising short term rates, it will be closely observed.

The ECB is facing a European economy that appears to be stalling, with even stalwart German GDP moving into negative territory during the second quarter. There may be some hints as to what additional measures to stimulate growth the region’s central bank is considering; Dr. Draghi’s remarks could have a sizable impact on the Euro’s exchange rate.

ESU4 Daily 220814

In order for all market participants to have access to the remarks more or less simultaneously, even those not fortunate enough to be invited to Wyoming, I expect that the texts of the speeches will be provided to the major wire services. They will be embargoed until the scheduled time, so we should start seeing headlines as the speakers step up to the podium.

There’s no way to determine with any confidence what the central bankers will say, or how the markets will react. It is important to be aware that there could be some volatility associated with their comments, and while I may set up trades along the lines that Todd Mitchell teaches as the “first fifteen minute/half hour breakouts” to take advantage of sharp moves, I intend to be otherwise flat in the E-minis. With regard to currencies, I plan to remain short EUR/GBP into Dr. Draghi’s speech, with a stop above .9035.

Best of luck today!

Quick Notes on EUR/GBP, FOMC

EURGBP Daily 200814

Hello, Friends. Currencies generally respond quickly to changes in the market’s perception of future interest rate differentials. My current favorite short, EUR/GBP, had a rough day yesterday as inflation data seemed to indicate that interest rate hikes might be farther off than previously anticipated. All is forgiven this morning, as the minutes from the Monetary Policy Committee (the Bank of England body that sets short term rates) meeting in August showed that two members were already in favor of a hike.

There are nine members, so the vote was still 7-2. The significance is that the votes for many months prior had been unanimous, and so the market is now moving its view as to when rates will begin to rise forward. That’s good for GBP; of course, currency trading is all about ratios, but in this case, there isn’t much positive happening on the other side of the divisor, EUR. Traders involved in the latter should be aware that European Central Bank President Draghi will be speaking at the Fed’s Jackson Hole conference on Friday. The assembled multitudes get Fed Chair Yellen for breakfast, Dr. Draghi for lunch. Quite the day for policy wonks, and potentially for fixed income and currency traders.

For those who trade futures, which is probably most of us here, please also note that the minutes from the FOMC’s July meeting will be released this afternoon. The time is normally around 2 PM EST, although that isn’t written in stone. As the headlines hit, there is the possibility of some random turbulence, and I plan to have positions squared up by then.

That’s it for now; as always, best of luck today!

Following Up on GBP (With a Segue to EUR/GBP)

EURGBP Daily 150814

Happy Friday, Friends. My daughter is interning at a money management firm in Boston. She reports that the office is more than half empty, and that all of the brass have already departed for the Cape or other weekend spots. That’s pretty typical of all asset managers in August, and it’s one reason why reactions to news can be exaggerated. Today, for example, the E-minis were knocked down, hard, by reports of intensified conflict in the Ukraine. I know of no way to handicap what’s going on in eastern Europe; all we know is that the market in all likelihood isn’t as long now as it was earlier today.

Wednesday saw economic reports out of the UK that suggested that the Bank of England might need more time before beginning to raise rates than Sterling longs had anticipated. I suggested holding existing short positions in GBP/USD, and establishing new ones around the 1.6890 area. Thus far, Cable hasn’t been anywhere near that level; after dropping to 1.6685 on Wednesday, it sagged further (to 1.6656) on Thursday, and thus far today is basically treading water just below 1.67. With the additional push lower, the Fibonacci levels have been redrawn, and in the daily time frame 1.6860 now looks like a reasonable level for those not already short to begin scaling in.

EURGBP Weekly 150814

EUR/GBP reached .8035 yesterday, a retracement sufficiently far from the recent low at .7873 to warrant a new short, even at today’s slightly lower .8025. This would, of course, be a long GBP position, but the outlook for the UK economy relative to that of Europe is still fairly rosy, and while a hike in interest rates might be more distant than seemed likely on Tuesday, the European central bank may well be forced to adopt additional easing measures, given poor GDP reports this week. A potential risk is the September 18 Scottish referendum on independence. If that vote proves to be in favor of separation (which is not widely expected to be the case), Sterling is likely to get crushed, and even the potential for deflation in the Eurozone probably won’t matter much.

Nonetheless, based on the charts, using methods taught by Todd Mitchell in his courses here, EUR/GBP looks to be a reasonable sale. A stop above .8050 looks prudent, while .7955 could serve as an initial profit target. A move to retest the previous low at .7873 wouldn’t be surprising, and would be a secondary profit objective. Of the major currency pairs that I’ve looked at, short EUR/GBP appears to have the most favorable ratio of potential reward to risk. There are never any guarantees, and a reversal is certainly possible. Still, at current levels, a stop would be roughly 32 pips distant, while a resumption of price movement in the direction of the overall trend, and a touch of the initial profit target, would represent a gain of roughly 70 pips. Guaranteed to work? No. Aligned with the trend on both the daily and weekly charts? Yes, indeed. Close to a viable entry point? Again, yes. All we can do is put the odds in our favor, have realistic profit objectives, and manage our risk in case things don’t go as we expect.

Have a great weekend!

 

 

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