Mon 17 Mar 2008
The Risk of Intervention
Posted by ray under Written Plan
Call me chicken, but except for a small short position in the ADUS, I closed out all my currency shorts: I had short positions in the GBP/JPY (203.47) and the USD/JPY (99.87).
To understand why, you need to understand that I ‘grew up’ trading forex in an environment that had an eye cocked for government intervention to slow the descent of exponential, directional downmoves in the US dollar. Today is almost like deja vue.
To show you what triggered this concern, I am attaching charts of three majors.
- The first is the EUR/USD. I compared the two most recent impulse structures. The first had an ATR of 95 points; the second had a 30% increase of the ATR to 124 with a standard deviation of 51. Mean plus 3 standard deviations is 153 + 124 = 277 i.e. there is a theoretical probability of less than 1% that the market would exceed that daily range. Today’s range so far is 219 i.e. we have had greater than mean plus 2 standard deviations. Theoretically, we’d see this only 5% of the time.
FIGURE 1 EUR/USD
- The second is the USD/JPY and it tells a similar story - an increase in the recent ATR. But here we have had a range greater than mean plus 3 standard deviations: today’s range is 336 points; mean +3 is 282.
FIGURE 2 USD/JPY
The third chart is the USD/CHF (US$ vs Swiss Franc). This tells a similar story to the USD/JPY. Increasing volatility with today’s range being mean plus 3 standard deviations.
FIGURE 3 USD/CHF
The GBPUSD has not joined the volatility party - so far.
The crosses tell very similar stories: today having greater mean plus 2 or 3 standard deviations of ranges.
The sudden surge in ranges across the board use to be a red flag of possible intervention. They tend to come just before a holiday break - the Good Friday long weekend would be ideal.
If you have never been caught on the wrong side of concerted action ….well believe me, it’s not a pleasant experience especially if you have failed to place stops. Yes, I know you always place stops but there are some traders who fail to take this simple precaution.
I have one student who says: “I don’t need stops, I am watching the market”…. oh well….. don’t say I didn’t warn you.
March 17th, 2008 at 1:14 pm
Ray
I sometimes use a mental stop which means I am in front of my pc; there is a beauty of mental stop. This allows trading without revealing the price/size of the intended trade.
However, it is not advisable if one has to step away from the pc even for a minute!
I would not advise a newbie to do this but now that I am an intermediate trader (2 years of trading) I feel I can handle a mental stop.
March 17th, 2008 at 1:23 pm
Hi Ana
Thanks for comment.
OK, I understand.
But be careful out there. Tonight is one night I’d place my stops in the market and happily run the risk of having the locals run it.
March 17th, 2008 at 2:37 pm
Hi Ray
With US interest rates going down, others going up etc, can you explain in simple terms what the ‘yen carry’ trade is/was, and how the US$ is at risk of beocming the next ‘carry trade’. Also does this represent an oportunity for us?
Thanks
March 17th, 2008 at 3:03 pm
In simplest terms: a carry trade occurs when you borrow in yen to buy say US debt. For example borrow 1000 million yen to buy US Bonds.
Initially (in Clinton years, (a lifetime ago?) You’d benefit in two ways: a) in the higher interest derived in the US and b)appreciation of the US$ vs the Yen.
However today with the US$ dumping and US rates dropping, there is no longer any benefit in this carry trade.
Can the US be the next carry trade? Only if it stops being the world’s reserve currency. Since the US$ is the defacto standard for the world’s reserve banks, the risk remains, for as long as it remains so, that some government or governments will dump the dollar. In such a situation the US$ will go into a free fall.
You’d think that that would suit the carry trade; however, what I have noticed is the carry gets unwound whenever there is excessive volatility. Nothing could be as volatile as the US$ if (or when?) foreign reserve banks unwind their US$ reserves.
March 17th, 2008 at 3:24 pm
Ray-san & Stuart-san
Perhaps, it will now be timely to buy AUD with cheap USD - a different carry-trade?
March 17th, 2008 at 3:37 pm
Hi Ana
I’d certainly buy the A$ as a directional play but it would not be a carry trade.
March 17th, 2008 at 3:47 pm
PS
If USD becomes cheap to borrow, at the rate the FED is cutting its rates, it may come to pass that people will borrow cheap USD to buy the strong AUD……….n’est pas?
March 17th, 2008 at 3:51 pm
Thanks Ray
“borrow yen to buy US debt”.
Am I correct in guessing that you mean borrow (yen)in forex terms, and buy (debt) in futures?
Stuart
March 17th, 2008 at 4:25 pm
Hi Ana
Yes possible; but for reasons I gave Stuart only, in my view, when the US$ ceases to become the reserve currency
March 17th, 2008 at 4:26 pm
Hi Stuart
Debt need not be, and probably won’t be futures. Debt more like 10 year notes.
March 17th, 2008 at 4:57 pm
Thanks, Ray. I’ve wondered if you exited during climaxes vs. waiting for the trailing stop to be hit.
Rob
March 17th, 2008 at 5:03 pm
Hi Rob
I guess I answered that today - although I wouldn’t classify the moves in the USD/JPY and GBP/JPY as selling climaxes.
For exits, I have two governing principles:
1) preservation of capital, maximizing return and minimizing risk of ruin.
2) Using Context to give voice to the (1).