The Wall Street Journal published this article which I thought to be very interesting and relevant to what we do and very in line with what we’ve been looking at and talking about. Have a look…
“Foreign exchange is finding new fans among hedge funds and global macro-focused asset managers, as tighter correlations between currencies and other assets prompt investors to use it as a proxy for other markets.
With a persistent state of crisis in the euro zone over the past year, key asset classes are now moving in lock step, leaving the correlation between the euro’s exchange rate against the dollar and U.S. equity returns near historic highs. Oil prices and the euro are also unusually closely linked, while the Australian dollar’s tie-in with global stocks is rock-solid.
To some investors, that is frustrating, because it hampers efforts to diversify returns.
But others are taking it as a cue to trade currencies as a proxy for less liquid assets elsewhere.
“With the outlook for the euro-zone crisis still very uncertain, investors use the euro as a short-term investment proxy to express their view on which way the saga appears to be heading. Accessing the foreign-exchange markets is often much easier and cheaper than trading directly in a country’s bond or equity markets,” said Des Morris, head of U.K. institutional client service at Wegelin Asset Management Funds SICAV—part of Wegelin, Switzerland’s oldest bank. Wegelin Asset Management oversees 1.6 billion Swiss francs ($1.68 billion) in assets.
The Australian dollar is another key target. Australian commodity exports, particularly to China, leave its currency closely linked to global growth prospects, to Chinese growth and to commodities as a whole. That makes it attractive to investors keen for exposure to any or all of those elements.
“Trading the Australian dollar is a way of expressing many macro views, not just an Asia view,” said James Pearson, head of spot currency trading at Royal Bank of Scotland Group PLC.
Liquidity in the currency is becoming sufficient to attract speculative traders, according to Mr. Pearson.
“It’s a nice way to hedge other exposures,” he said.
Other banks say that their clients are turning to currencies in growing numbers. “The S&P and the Australian dollar have a correlation of around 78%. So many clients are asking themselves: Why trade the S&P? FX is open 24 hours a day, you can trade at speeds of 13 milliseconds, you have very, very low transaction costs, and you can trade in large sizes,” said Anil Prasad, global head of currencies and emerging-market rates at Citigroup Inc. in London.
“No major asset class experienced the type of volume growth we had in FX last year. For us, FX volumes grew by 30%, even more with some client segments, like institutional clients and wholesale banks.”
On Monday, Citigroup launched a new, faster currency-dealing system, partly to help deal with these new clients. The system will handle only currencies at first, but is designed to handle additional asset classes over time, starting with commodities and rates, and later, stock indexes and credit.
Still, crossing over into foreign exchange isn’t for everyone.
The constantly shifting nature of correlations—whether currencies will continue to move in line with other assets—will make some funds skeptical of incorporating it into their trading strategies on a regular basis. Some funds aren’t permitted to move into new asset classes under the terms of their investment mandates.
“It would depend very much on the fund. Some funds are limited by the percentage of their portfolios or a measure of value at risk,” said Adrian Owens, an investment director managing fixed-income and currency-based hedge funds at investment firm GAM. The company has $60.2 billion in assets under management and is part of GAM Holding AG.
Moreover, dabbling in currencies doesn’t always generate returns. Even currency-focused hedge funds lost 3% on the year in October, according to the latest available data from Parker Global Strategies, which invests in currency hedge funds. Last year is widely regarded as having been a dismal time for currency traders.
Still, enthusiasts include global fixed-income and global macro asset managers, who tend to be keener than their counterparts in equities, according to Nick Spencer, director of consulting at investment firm Russell Investments.”
See original article here: http://on.wsj.com/xI79m8
This is a great article by Boris Schlossberg, have a look:
“One of my favorite traders of all time is Paul Tudor Jones. In a business that destroys most money manager within three years he has survived for more than thirty trading on nothing more than his wits and an iron-clad risk discipline.
In an interview with Jack Schwager a long time ago Mr. Jones offered a very simple formula for success that we should all adopt. Ha said that traders can consider themselves successful if their drawdowns are no more than one half of their valley to peak gains. Put simply that means if your account has increased by 1000 points over say a course of 3 months then you cannot give more than 500 points back to the market if you want to maintain long term success.
I love the simplicity of this idea because it eliminates a massive amount of unnecessary math and provides a realistic business plan for trading the markets. It also creates a proper set of expectations. Want to make 100%? Then be prepared to lose at least 50% of your capital. Think about that for a second. This is a formula for success – not failure – and yet it shows that even under the best of circumstances we must be willing to lose half of our money if we want a chance to double it.
This rule of thumb is particularly important to FX traders who regularly use high levels of leverage because it helps explain why most traders fail miserably. If you ask traders what’s the maximum percentage of capital they are willing to lose most will answer no more than 20%. Yet the reality is that if you are trading on 10 times leverage and are shooting for 10% cash on cash return (which at 10:1 lever factor translates to 100% gain or a doubling of your account) then you should be happy to lose only 50% of you stake. Of course no one is happy to lose 50% yet everyone wants to double their money and therein lies the problem for anyone who trades speculative instruments.
The answer to how much do you want to make depends on how much are you willing to lose. If you don’t have a realistic assessment of risk before you put your capital in play you will never succeed in trading.”
2011 has been a GREAT year, now lets just sail on into 2012 like a whistling dixie!! Kind of like this guy…..
It’s that time of year again. Today is December 23, which means it’s time to drag out the old aluminum pole and celebrate Festivus.
As everyone know one of the key parts of Festivus is the annual “Airing of Grievances.” With the protester being named Time’s “Person of the Year,” and the emergence of Occupy Wall Street and the continued popularity of the Tea Party, 2011 was full of grievances.
Here’s a collection of some economic grievances over the past year. To quote Frank Costanza, “The tradition of Festivus begins with the Airing of Grievances. I got a lot of problems with you people! And now, you’re gonna hear about it.”
Ben Bernanke:
“If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost … treasonous in my opinion.” –Presidential candidate and Texas Gov. Rick Perry
The Fed:
“We have serious concerns that further intervention by the Federal Reserve could exacerbate current problems or further harm the U.S. economy. Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers. To date, we have seen no evidence that further monetary stimulus will create jobs or provide a sustainable path towards economic recovery.” –Sen. Mitch McConnell, Rep. John Boehner, Sen. Jon Kyl, Rep. Eric Cantor, the top four congressional Republicans
Fed critics:
“Last October, I won the Nobel Prize in economics for my work on unemployment and the labor market. But I am unqualified to serve on the board of the Federal Reserve — at least according to the Republican senators who have blocked my nomination. How can this be? The easy answer is to point to shortcomings in our confirmation process and to partisan polarization in Washington. The more troubling answer, though, points to a fundamental misunderstanding: a failure to recognize that analysis of unemployment is crucial to conducting monetary policy.” –MIT economist Peter Diamond, withdrawing his nomination to the Federal Reserve Board
The rich:
“There is nobody in this country who got rich on his own. Nobody. You built a factory out there — good for you! But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for.” –U.S. Senate candidate Elizabeth Warren
Those who criticize the rich:
“Tearing down the rich does not help those less well-off. If you favor employment, you need employers whose businesses are flourishing.” –Wilbur Ross chairman of WL Ross & Co. LLC
Big Banks:
“I suggest that the problem with [the largest and most complex financial companies, the so-called systemically important financial institutions] is they are fundamentally inconsistent with capitalism. They are inherently destabilizing to global markets and detrimental to world growth. So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril.” –Thomas M. Hoenig, former President of the Federal Reserve Bank of Kansas City and current nominee to be the No. 2 official at the FDIC
Big Bank critics:
“I just think this constant refrain ‘bankers, bankers, bankers,’ — it’s just a really unproductive and unfair way of treating people. And I just think people should just stop doing that.” –J.P. Morgan Chase & Co. CEO Jamie Dimon
Government role in the financial crisis:
“If you want to put people in jail, you ought to start with Barney Frank, Chris Dodd.” –President candidate and former House Speaker Newt Gingrich, responding to a questioning about why Wall Street executives weren’t arrested after the financial crisis.
Critics of the government’s role in the financial crisis:
Assertions that actions taken during the financial crisis were aimed at protecting Wall Street “could not be more wrong. We were convinced then — and are still convinced now — that our efforts were essential to preventing a wide-scale economic collapse.” –Rep. Barney Frank (D., Mass.)
The euro zone:
” The eurozone’s current muddle-through approach is an unstable disequilibrium: kicking the can down the road, and throwing good money after bad, will not work.” –Nouriel Roubini, NYU economist
ECB critics:
“We were called to deliver price stability! We were called on by all the democracies of Europe to deliver price stability and, in particular, of course by the 17 democracies that asked us to issue the currency in their 17 countries. We have delivered price stability over the first 12-13 years of the euro! Impeccably! I would like very much to hear some congratulations for this institution…” –Jean-Claude Trichet, former European Central Bank president
Ratings agencies:
“It is … worth noting that S&P has a horrible track record for judging credit worthiness. It rated hundreds of billions of dollars of subprime backed securities as investment grade. It also gave Lehman, Bear Stearns, and Enron top ratings right up until their collapse. Furthermore, no one was publicly fired for these extraordinary failures. Investors are aware that S&P’s judgement does not mean very much.” –Dean Baker, co-director of the Center for Economic and Policy Research, following S&P lowering its rating outlook on the U.S.
Economists:
“There is a real sense in which times like these are what economists are for, just as wars are what career military officers are for. OK, maybe I can let microeconomists off the hook. But macroeconomics is, above all, about understanding and preventing or at least mitigating economic downturns. This crisis was the time for the economics profession to justify its existence, for us academic scribblers to show what all our models and analysis are good for. We have not, to put it mildly, delivered.” –Princeton economist and New York Times columnist Paul Krugman
Thanks to Wall Street Journal for this article: http://on.wsj.com/tQ3WMf
As 2011 comes to a close I’ve been thinking about all the things that have happened this year and realized that all my memories are based in market related news. Some of the big events that stand out include the eruption of the European Union debt crisis, the US debt negotiation this last summer, wildly choppy market conditions as a result and so on. Many of you will remember the article I posted a while back from Reuters about 2011 being the worst year for currency traders since 1991. We’ve all seen the very difficult market conditions this year, fun and complicated all at the same time.
But the point of it all is this, 2011 has had other events other than what we see in the markets daily. I’ve got to remember to widening my horizons and think about the world as a whole. Here’s a great little video that covers some of the interesting events of 2011…..
We have some exciting set ups in the works, there should be good longer term movement forming that could carry a trade well into the first of the year. There’s going to be some interesting action as we get into the weekend and during the week between Christmas and New Years, volume can be pretty low during that week. But with some slightly longer term trades it will be much easier to survive the “chop and slop” that will likely happen over the next few days.
Gold has moved down extensively over the last few weeks, naturally it is retracing some amount of that big move down. Have a look at the gold chart below:
If gold can continue this break out down after the 38% retracement the EUR/USD should follow not far behind, the set up on the EU is correlating nicely with gold.
Remember, the European Union is replete with surprise news announcements so this is where the longer term run will be a good way to side step all the surprise spikes, as this pair continues to hold onto the trend.
Watch Gold and the EUR/USD and follow the movement through the break out levels while correlating the break out direction and trend between the two pairs.
The GBP/USD is setting up very nicely, this is the next leg of movement for the long run that I’m looking for, see diagram below:
I know many of you have been asking yourselves, “what exactly is entailed in the EU bailout?” Well ask no more, this explains all the “need to know” information about the bail out, and in fact how all bailouts work (or don’t work).
The European Bailout Explained
As you can see in the title we’re going to examine how some of the worlds most prominent currency funds have done through the wild market movements of 2011. This year has been one of the most wild I’ve seen in my 10 years of trading, most of it can be attributed to the government involvement in the markets. Japan has intervened twice on behalf of the Yen, Switzerland has done so as well, the US squabbled about a budget, the European Union has been in shambles and so on. The drama in the market has been endless.
Reuters reported the statistics of the various currency funds here:
Currency-trading strategies are losing the most in two decades as the volatility that’s boosted volume and profits for investment banks erodes the ability of investors to make money.
Three out of four Royal Bank of Scotland Group Plc indexes of foreign-exchange trading strategies are down this year, including a 2.7 percent drop through September for its carry trade index. Deutsche Bank AG’s dollar-denominated Currency Returns Index has fallen 3.4 percent, the biggest drop since a 4 percent slide in 1991. The Stark Currency Traders Index and the Barclay Currency Traders Index have declined by 8.6 percent and 0.4 percent.
Whipsawed by slowing global growth, central banks fighting currency gains, and swings between optimism and despair over the 17-nation euro area’s debt crisis, traders are reeling from losses in an environment that should have favored them.
“What’s really frustrating is that we’re supposed to do well in a lousy world market,” said John Taylor, the founder of New York-based FX Concepts LLC, the world’s largest currency hedge fund. Taylor said in an Oct. 19 interview in London that he has lost 12 percent this year and assets under management fell to $5 billion from as much as $8 billion. “We’re doing very badly.”
‘Walloped Every Time’
Losses started as early as the first week of January, when Chile’s central bank said it would buy $12 billion dollars to stem a rise in its peso, Taylor said. The peso tumbled 6 percent that week, erasing most of its 8.4 percent gain from last year.
“Our position was relatively large, it was 8 or 9 percent of our total assets, and there was no way to get out,” Taylor said. “What was bad about it was that a couple of days later Israel did the same thing, then a week or so after that South Africa did the same thing, then after a little bit more study Brazil did the same thing. We got walloped every time.”
The losses are a blow for specific types of currency funds that seek to lure investors with trading techniques that are designed to provide returns in economic declines as well as in periods of growth.
Other investment classes have also suffered. The MSCI All- Country World Index of equities slid 5.6 percent since December and S&P’s GSCI Total Return Index of commodities is little changed. The global bond market returned about 4.7 percent, including reinvested interest, according to Bank of America Merrill Lynch indexes.”
Continue reading this article here
So for those of us that are wondering if these are normal market conditions the answer is a definite NO! The great news is that if this has been the worst year of currency trading for all the “big money” and many others, the year is just about over. We’ve survived and actually made some pretty good pips along the way. However this market can give us so much more and I am very excited to see conditions get back to a more “normal” status.
Hang in there traders, it only gets better from here!
If you’re not up to speed in what’s happening currently in the stock market (which in effect comes back on the currencies) I’ve got a great video that will sum it up nicely. Take 6 minutes and get completely up to speed with current market conditions.
