Goodbye QE

Those of you who follow my twitter know I have been repeatedly talking about some of my fx trades, specifically long USD/NOK (the 200DMA breakout was a beauty), USD/JPY, USD/HUF (ht Aaron Murphy), USD/CAD; short EUR/USD, GBP/USD, AUD/USD. These have been working terrifically, as the USD has been revived because of pervasive sovereign credit risk abroad with no marginal excess dollar liquidity to overcome demand (QE is all but over).

Some quick notes about those trades:

I like the NOK and HUF as shorts against the USD because they’re great vehicles to target CEE risk (in my opinion, the next shoe to drop in Europe after the PIIGS). As per NOK, Nordics have huge eastern Europe exposure and I expect their status as the regional “safe havens” to be called into question as the CEE debacle heats up again. I’ve been (vocally) short EUR/USD since Thanksgiving, but I have been taking lots of profits in recent weeks– not because I believe that fears are overblown or that Greece/EU/any entity out there is structurally sound, but because of the risk of sudden Fed intervention (liquidity swaplines to essentially the entire globe in 2008 + to Italy in 1974 set the relevant precedents), causing a short squeeze I simply don’t want to risk being a part of. Nevertheless, I’ll continue selling short EUR/USD on strength, and agree that the probability of complete euro dissolution is higher than many people expect. For now, however, I’m keeping it to speculative sizes, but the bear flag that broke down is looking like a great short opportunity.


GBP/USD is another long-term short for me, although I also took a lot of profits in the 1.48-1.49 level. A fresh break of support may trigger a sizable bearish bet against pound sterling again from me. USD/JPY is a long-term buy that I’ve expressed support for several times. Big moves in this pair in the past few days. JGBs finally may get the crisis everyone’s been waiting for and the yen may be headed for big inflation. USD/CAD is just for a trade at this point. Fundamentals just aren’t there yet to bet big against Canada (if/when property bubbles burst, then it’s a different story) and this is just a technical trade. Similar situation with Aussie Dollar, though I consider that one very overvalued and correlated with risk assets as a whole. AUD/USD has gone nowhere for months now, this is looking like it’s topping and will be a helluva short. Some words on the Aussie Dollar from fellow ShadowCap contributor Qasim Khan:

While there is an array of opinions regarding the effects of the health care overhaul (master prognosticator Jim Cramer calling for a double-dip because of the bill), the truth is the effects of the bill are about as clear as the Greece bailout resolution (are they or aren’t they). Instead, I find it far more useful to spend my time analyzing something far more understandable: AUD/USD.

Perceived relative economic superiority and hawkish interest rate policy by the Reserve Bank of Australia have fueled a cogent AUD/USD rally over the past year. While the USD has enjoyed a significant rally against European currencies since November/December, the AUD and JPY have lagged, trading in pattern ranges. And while there are continued rumors of further rate increases by the RBA, the 50% appreciation from last year’s lows would indicate that the aggressive policy response has been priced in in its entirety, rather than individual interest rate hikes. Despite record outflows from money market funds, equity volumes reveal a complete lack of conviction in risky assets that have enjoyed a ride up. Nearly every trader I’ve spoken with, regardless of how bullish or bearish they have been in the past, has treated the most recent leg of the rally with skepticism. I doubt it would take much to break the weak rally and with the extreme degree of uncertainty (Greece, health care, US-Israel-Iran-China foreign relations, Ali Farokhmanesh, etc.) there is no lack of stimuli for the reversal, sentencing an end to the carry-trade fueled attractiveness of currencies like the AUD.

The miraculous health care victory for Obama potentially presents some concerns for the USD in the longer time frame (a topic to be discussed in greater detail), but that is another issue altogether and likely won’t provide enough of an impetus to fuel a push through formation resistance in the near future. The USD looks poised for another leg up with the DXY rallying off its 50dma. It would not be surprising to see the AUD/USD rally here from .91 levels; DXY is at a previous resistance near 81 and may require another attempt before it breaks upward. However, doing so would open up the possibility of a textbook head-and-shoulders reversal on the 30d AUD/USD chart. Either way, there appears to be significant downside to the AUD/USD at this time.

As per equities, energy is the sector I’ve been suggesting shorts in and it remains that way. Oil contango trade from late 2008-early 2009 can’t be rolled over at these normalized spreads and crude is probably topping– taking out $85/bbl would render my opinion wrong. Lots of weak issues in energy showing up to me as great shorts, eg CHK HK DVN (as well as ETFs OIH and USO). Commodities in general seem toppish, not just oil. Look for FCX and X to be big shorts again soon.



S&P is right back to its crash breakdown level just under 1200. Stalking general market to short, but just stalking for now. Technicals not allowing big bets yet, though the distribution days are piling up. Energy is the only safe short in equity imo right now.


Long USD is the trade I have on in most size. Flatteners, esp in 3s5s and 2s30s arena, looking good. Crude looking like a good short, while stalking HY, copper, and S&P on short side. When general market rolls over (commodities will probably lead the wave down), financials and REITs may crash down to more realistic valuations. But patience is a virtue for short sellers in this Fed-directed market. Wait for the patterns to allow it– eg energy stocks right now.

China’s no longer (at least at the moment) recycling USDs into Tsys. Bills are yielding nothing and the current yield curve environment make the Treasury’s funding situation appear very bleak now that Fed-originating demand is out of the picture. A thesis I have been pushing for months (and one recently picked up by Zero Hedge) is that the Treasury needs a new massive bid for notes and bonds or it will face a spike in interest rates that will kill any sort of recovery, particularly with the Obama Dems in power and continuing their spending binge (disclaimer: we’re just as critical– if not more– of Bush’s GOP administration). Without a second iteration of QE (which the bond market responded to with a huge steepener trade, calling Bernanke’s bluff without even a second attempt), there needs to be big reallocation away from risk assets and yield. The USD has began its reversal rally and the carry trade is off and unwinding. The stars seem to be aligning for the next wave down in equity, but as I keep saying, patience is key. Commodities, however, are rolling over and are ready to be shorted. Keep shorting the EUR and energy stocks on their 50DMA and 200DMA retraces and buying USD on 50DMA bounces.

Good luck trading.

This entry was posted in Market Commentary. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s