Some of the best trade's are the one's never made...

So earlier this week I wrote that upon returning to work this week I would be re-emtering the EM market's. Well I am happy to say that I luckily did not do so. Why, well I think it had alot to do with the over riding feeling of nervousness that was previlent in my office and in conversations with other trader's.

It seems to me that the best way to approach these markets is with extreme caution. Do not look for "home run's" and to trade from a (I cannot believe I am going to say this) negative carry prospective. Until the Fed cut's the Fed Funds rate (and I think it will happen sooner rather then later) you should be long dollars. After the cut then short the dollar. These markets are difficult but there is plenty of opportunity. I am currently pretty sq in my interest rate positions and looking to "scalp" a few points here and there in spot. Not my usual style but these type of markets are not usually very friendly to me.

Market talk....

Local South African's seen in buying Usd/Zar.
Large Funds selling Aud and Aud crosses.

Opinions

Mexican central bank desperatly wants to raise rates to combate inflation but will not (cannot) until this sub-prime mess dies down.

Watch inflation (especially in the food component of EM countries) this is the first place it hit's. It starts here and moves on from there. This will be the death spiral for the markets.


Good Luck and Good Forex trading...

Sunshine needed....

A couple of weeks at the beach and barly a tan line to show for it. Back to work on Monday and hopefully the markets have calmed abit. Really haven't looked at much since I left, BUT I think I will be selling dollars against EM......(it is hard to teach old dogs new tricks!!)

Good Luck and Good Forex Trading....

The Fed Respones (Finally)

The Fed came to the rescue today cutting theDiscount Rate 50bp to 5.75%. The markets have taken this news very well with stocks reversing early loses and piling on gains. It is VERY important for the markets to hold these gains today. I must admit I am not sure they can do it. Banker has been on vacation all week (and next week also) and has been watching the markets with only one eye. Although the devistation seems alot less when you do not look at the screens all day, the nervousness that I view on the TV (CNBC etc etc) is real. This cut in rates is important, it shows that the Fed is

1. Taking the current situation very seriously

and more importantly

2. Taking the lead in the financial markets by being the first CB to officially cut rates.

I think the markets needed that. Time will tell of course but for now I think (and hope and pray) we may have pacified the markets at least short term. Financial stocks are very bid this morning and look for Wells Fargo to lead the way higher after some very bullish talk from Jim Cramer last night.

Good Luck and Good Forex trading. I am off to the beach to work on my tan.

Dollar benifits from the turmoil

The dollar has benefited from the turmoil in the market in recent weeks. The reasons I see for this are:
1. Uncertainty in the market and traders run to the U.S. dollar for safety.
2. Selling of more risky assets (carry trades) and placing the money in safe U.S. Treasuries. Even with all the volatility if you hold the Treasury till maturity you will have all of your principal.
3. The view that this sub prime issue will lead to a slow down in the U.S. economy and therefore a decrease in the deficit which would lead to a stronger dollar.
4. Lower U.S. rates (see yesterday's post) which would decrease the interest rate differential resulting in dollars being more attractive.


Take your pick as to why, but for now it is happening. I am not sure how long it will last and still suspect that by year end the dollar will be at its weakest point of the year, but only time will tell.

Good Luck and Good Forex Trading.

Is there a rate cut on the Horizen.

On Friday morning I was called into a meeting with the Global Heads of all the relevant business heads in my organization. The topic, Will the Fed do an emergency Ease?

It is a good topic and one not taken lightly. Clearly there is a problem. This sub prime mess although "small and contained" is taking a toll on the overall market. Think about it in terms of your family. You are on vacation, hiking in Yellowstone park and you have an ingrown toenail. Small problem, easily fixed, if you do something about it. If you do nothing it would ruin your vacation and make everyone around you miserable.

Fed officials, and many "talking heads" on TV have stated that this is a very small problem in regards to the overall economy. I think when you walk down the street they are absolutely correct. But in Treasury's around the world it is a much bigger problem, one with far reaching consequences.....FUNDING. Banks, and corporations are having trouble funding their balances sheets. Paying as high as 6.0% (up from the Fed official rate of 5.25%) for o/n dollars. The entire curve has pushed out and the market has traded considerable wider. This is a real problem when you pay an additional 75bp to fund your position this money is gone. You cannot make it back (unless another day you fund at 75bp below the effective). The Fed (and ECB) have responded by making available all necessary funds to ensure that their is no problem. The Fed on Friday funded the market (billions of dollars) on three separate occasions.

As one head of a funding desk told me, "their is no problem getting funds....it is at what cost you get them?". Isn't this what got us into the problem in the first place. People getting loans to purchase houses with less then stellar credit,finances etc.....at higher rates then usual and when things go bad (lose a job,need to sell,etc) walk away and let the mortgage default. If you cannot fund your assets, be it an individual mortgage or a CMO owned by a bank you have no alternative but to walk away.

Flooding the o/n market with funds may work. I am not an expert economist, but I think from judging market movements, they are looking for a more permanent solution.

25bp cut in the official lending rate Plus adequate liquidity to get the market through this hump ?? Time will tell.

Good Luck and Good Forex trading.

Rates held steady

So the Fed held rates steady today, which based on the market reaction was basically expected. Thet reaffirmed its expectations for moderate growth ahead and inflation as its predominant policy concern. But I do they they left themselves abit more "wiggle room" to move on rates if the situation warrents but I for one am not looking for that.

Good Luck and Good Forex Trading....

The Fed Stuck between a Rock and a Hard Place..

So what is the Fed to do. If they cut rates today the market can perceive that they are truly worried about this Sub-Prime mess and really hit it hard. If they say nothing they can be perceived as being "out of touch" and ignoring a problem.

I am of the opinion that they will hold rates steady, and say very little if anything at all. I feel that the Fed is still very concerned about inflation (right or wrong it has been a consistent theme)and that they view this Sub Prime issue as an isolated event which should be contained. I would not be surprised for a statement such as "We are keeping a close eye on the situation" but any cut in rates now (25bp would do very little you would need 50bp at a minimum)would be viewed as a panic.

Good Luck and Good Forex Trading......

What next.....

So the world has ended (did you see Jim Cramer lose it on CNBC on Friday?!) and half the free world is now hiding their money under the mattress, but what happens next.

Jim Cramer is looking for the Fed to step in this week and cut rates. This view is not all together isolated. I have heard talk of the Fed cutting as early as tomorrow (Monday Aug 6) and then using the regularly scheduled meeting on Tuesday to explain their thinking. This is all possible, but I am not betting on it. Remember the Fed is still quite concerned about inflation and more then one Fed governor has come out in the last few days calling this Sub Prime meltdown as "contained". Clearly the meltdown has happened quite quickly, and to a greater extent then anyone every thought possible (Ok not everyone...but certainly me). I wish I had answers, but I don't. This is one of those times that I have been wrong (in a big way) and I need to start again. Also this is my last week in the office before a two week holiday. Therefore I will be squaring down as much as possible and look to start fresh at the end of the month. My Predictions are that.....

1. The Fed leaves rates unchanged, but in the statment the Sub Prime mess is mentioned and the Fed states that they are ready to act if necessary.
2. Stocks stabilize (I am not brave enough to say we have found a bottom yet.
3. The dollar does better against major currencies and EM regains its footing (no gains for the momment but stabilizes like stocks).


Good Luck all......and good Forex trading to you....