Sunday, May 13, 2007

Downgrades, rate hikes.....who cares, ride the wave!!

Certainly not Emerging Markets. In the last few weeks we have seen a surprise rate increase in Mexico and a downgrade in Turkey, as well as considerably deteriorating politically scene and still both currencies have ended the week at thier strongest level in months.

Why fight the is trend? Sure there are "hic-cups". When the Mexican CB raised rates unexpectedly it was a painfull mark to market day but remember if you are trading a portfolio based book it was just one of many currency position's you had on. Let's take a look at a few currency and countries.

Inflation numbers came out again this week and they were again quite low. Logic says that a CB does not make just one change in rates so I expect another rise in the near 3 months (co-workers thisnk sooner). I am currently short interest rates (small and mostly trading forward forwards to limit my risk if another rate hike occurs sooner) and long the currency.

Why fight a good thing. Rates are going lower. The CB has basically said that. The last vote was 4-3 for a 25bp cut with the 3 asking for 50bp. This adds to the pressure on the currency. This is a trend....ride it! I am short rates (not as much as I would like but try to sell everyday) and long the currency.

Wow have I ever missed this move! This currency has been a one way street for weeks (actually months) and I have caught very little of it. Does it continue I am not sure but I certainly would not stand in the way. I am out of this currency presently and will stay that way.

I have always used this currency as a funding currency. Rates are basically on top of dollars and I expect that to continue. I use this currency as a type of hedge against my portfolio to allow me to take more aggresive position in other regions.

Rates here are going up. The currency should continue to do well against the dollar. I am currently long Euro against the dollar in a small way, and will stay that way for now.

As a co-worker said on friday. The currency is downgraded, political problems, and still the currency ends the week at its strongest level! 19% positive carry is a powerfull plus to staying long this currency.

I remain long dollars against China (and now Hong Kong). I still think that the currency apprciation built into the market is more then the Chinese government will allow. I am playing this region as a "basket", being long dollars against China and Hong Kong and short against Korea (I want to sell against India and Indonsia when I get an opportunity). I heard of a lot of dollar selling by funds against Asia on Friday.

Basically, take what the market is giving you. I have said for years now that globally I see rates converging. This view has not changed.

Good Luck and Good Forex trading.



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