Tag Archives: dollar

Commitments of Traders Report Predicts Dollar Strength

We’re swing traders, rarely holding a position more than two weeks. Even so, it’s important to understand the macro environment of the market being traded. The idea is to predict volatility expansion and market surprises in the correct direction, thereby providing a profit taking opportunity. Given the tremendous disagreement on the Federal Reserve Board’s expected actions by the general public and within the Board itself, it makes the likelihood of volatility expansion following next week’s unemployment numbers much more likely. Furthermore, it’s possible that the market could be handed consecutive reports pushing the market in the same direction, rather than instantly reversing course as has been the recent case with any two reports. This combination could push the Dollar through the last year’s resistance making the current weakness an opportune buying moment.

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Weekly Commodity Strategy Review

We began this week by revisiting the sugar futures market. We started talking about it a couple of weeks ago for Equities.com in, “Time to Sweeten on Sugar.” We updated this outlook Monday for TraderPlanet.com. This trade finally triggered on Thursday and currently sits above the $.1310 level that we believe will induce some speculative short covering. See, “Sugar Prices on the Decline.”

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Record Position Narrows US Dollar vs. Euro Currency

Something happened on the way to parity between the US Dollar and the Euro currency. Amidst the rhetoric of Mario Draghi and his Quantitative Easing forever platform, both the Dollar and the Euro have accumulated record positions among the commercial traders. Given the trend and considerable decline this seems reasonable until the data is actually absorbed consciously and it becomes clear that the record positions in both markets are opposite the trend and bode strongly for this spread to narrow.

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Is the Canadian Rout Over?

The Canadian Dollar was trading above $.94 as recently as June. This has provided a clear picture of what can happen to an unevenly balanced economy whose currency value has become pegged to any individual sector. The global economy slow down and the associated decline in oil has absolutely pounded the Canadian Dollar to the tune of a 15% haircut in six months. That’s a very large move in a first world currency. Fortunately, we can use the commercial traders’ forecasts derived from the CFTC’s weekly Commitment of Traders report to keep us on the look out for the big moves and out of harm’s way.

The first point to make is that we only take trades in the established direction of the commercial traders’ momentum. Therefore, we spent the first half of the year looking for selling opportunities as the commercial traders sold more than 100,000 contracts through June of 2014 between $.89 and $.93 cents to the U.S. Dollar.



You can see on the chart below that commercial traders were quick to cover a little more than half of their short position through fall’s decline between $.87 and $.91 cents to the Dollar. This left them comfortably short for most of the decline and leads us to our current situation.

Commercial traders predicting and taking advantage of Canadian Dollar's decline.
Commercial traders predicting and taking advantage of Canadian Dollar’s decline.

Commercial traders now appear to be once again interested in the long side of the Canadian Dollar trade. Their recent purchases of approximately 15,000 contracts has been strong enough to turn momentum’s tide and put us on the lookout for buy signals like the one generated last night. We’re not sure how all of the global banking variables are going to sort themselves out over the coming year but, we do see this as a supported trading opportunity on the long side of an oversold first world currency.

Global Uncertainty Strengthens Dollar

Five years ago the financial world was coming to an end. The stock market tanked and interest rates went negative due to the unsurpassed flight to safety in U.S. Treasuries. Most of this was due to greedy lending practices that claimed to be championing President Clinton’s thesis that everyone in America should be able to own a home. Lax lending requirements that were intended to get lower income earners into their own homes travelled up market and allowed upper middle and upper tier earners to refinance their houses at artificially low rates to buy second homes and Harley’s. Once again, misguided bureaucratic endeavors have been perverted by greed. The roaches in China are beginning to surface and the banking system stress tests in Europe are uncovering the depth of this five-year-old issue and once again, the primary beneficiary of these actions will be the U.S. Dollar.

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Trading’s Gut Check

Actively participating in the markets comes with the understanding that the trader’s gut will be checked frequently and deeply. The primary cause of this is the trader’s degree of certainty in an uncertain world. It’s been proven over and over again that once an individual feels that they have enough information to make a decision, they will. Additional information provided after the fact typically raises the degree of certainty that the correct decision was made, rather than raising the degree of accuracy. So, I sit in front of the Federal Reserve Board’s announcement this afternoon involved up to my eyeballs in the US Dollar, Euro currency, 10-year Treasury Notes and the Russell 2000 stock index.

Each one of these positions is the result of mechanical trading programs that I’ve developed, tested and traded. Therefore, there are no arbitrary decisions or adjustments to be made. This leaves me in front of the screens sitting on pins and needles waiting for a range of possibilities to materialize. Given my experience with the markets, I expect the outcome to be somewhere in the middle. Rarely does it turn out one sided either positively or, negatively.

Let’s review the possible outcomes and the gut wrenching turmoil that comes with sitting on several large positions as I try to close out the books for 2013. My oldest position on the books is short the Euro FX. I stand to profit if the Euro currency weakens against the US Dollar. I’m short the market near the top of its range based on my research into the Commitment of Traders Reports. I know that there’s about a 60% chance the Euro will back off these highs by about a penny and a half. However, the market’s continuing consolidation near these highs puts me in a position where I could be stopped out of the market with a loss even before the Fed announces its decision this afternoon. The market’s proximity to my stop loss order contributes greatly to my angst.

The opposing position to the Euro is my long US Dollar Index position. Again, I’m long the US Dollar Index against a basket of currencies, which is dominated by the Euro. If the Fed suggests that they will begin to taper quickly, the Dollar should rally. Pulling stimulus out of the economy will place fewer Dollars in future circulation thus, increasing the value of the Dollars already in the market. The Dollar would rally and the Euro would fall. Both of my currency positions would be profitable.

Tapering by the Fed would most likely crush my 10-year Note position. Frankly, the discretionary trader in me can create the strongest case for owning 10-year Notes and betting against taper talk. Based on my analysis of the commercial traders in the 10-year Note I fully expect any decline in Treasury prices to be short lived. Commercial traders have accumulated their largest net long position in the 10-year Note since April of 2005. Commercial traders have dominated the big moves in the Treasuries with uncanny accuracy. If they’re right about no taper talk this afternoon, Treasuries will rally substantially and I’ll profit from my position….while losing on my currency trades.

This leads to my final position. I use a pretty fancy program for developing my day trading systems. Whereas my swing-trading program is based on the fundamental data inferred from the collective positions of the markets’ participants, my day trading programs are strictly technical. Knowing that the markets will unfailingly put a man to the test, it should come as no surprise that my day trading programs now have me long two units of the Russell 2000 stock index heading into this afternoon’s announcement. Furthermore, while I have some expectations of how the currencies and Treasuries will react to the Fed’s decision, the stock market’s reaction is far less predictable. If the Fed tapers, the stock market may rally further based on the assumption of a strong economy leading to further gains. However, the collective reaction could very well be violently lower as tapering could signal the end of the free money that many believe has fueled the rally to this point.

Discretionary traders face conflicting data like this all of the time and pick and choose which markets they’re in and when they’re in them. Systematic traders follow the signals generated by their programs without question. The cruelest aspect of trading is the market’s uncanny ability to seek out a traders’ weak spot and twist agony’s knife. I’ve been actively trading for more than 20 years and the trepidation of a pending report never goes away. This is where the classic line, “Plan your trade. Trade your plan” has the most value. Remember, additional information acquired after the fact doesn’t increase the odds of being right, it simply tricks the mind into greater certainty of the existing thought pattern.

Jumpstarting the Japanese Economy

The Japanese economy has languished in a deflationary environment for years. The recent Parliamentary elections have ushered in the potential for major shifts in policy, both ideologically and practically speaking. The election of Shinzo Abe as the new Prime Minister and overwhelming support for his Liberal Democratic Party will allow the new regime to control both the upper and lower houses. Therefore, no bargains or watered down policy will need to be struck. The sweeping results are a clear statement by the Japanese people that they expect action to be taken to loosen the money supply, inflate the economy and devalue the Yen.

Japan’s economy is roughly 1/4th the size of ours and places them as the fourth largest economy in the world. Therefore, full-scale policy shifts are rare and require a good bit of fortunate timing to implement. There are enough pieces in place to see more unilateral action by Japan as Mr. Abe focuses on the immediate needs of his people rather than finding the right political fit for Japan within the global political dynamic.

Deflation has been the key to the Japanese economy since the late nineties. Over the last 13 years they’ve recorded two inflationary years – 2006 and 2008. Mr. Abe wants to target new inflation and growth targets of 2% and 3%, respectively. Japan hasn’t recorded inflation above 2% annually since 1991. He expects to reach these goals through pressuring the Bank of Japan to loosen lending requirements and purchasing construction bonds for public works projects as their own method of Quantitative Easing. He also expects to include the first steps of domestic military spending to assert their claim to islands in the South China Sea as well as domestic pork barrel subsidies and governmental contracts to boost domestic GDP and help bring them out of recession.

However, considering that Japan already has one of the highest debt to GDP ratios in the world, ranking only behind Zimbabwe, Mr. Abe’s intentions are being watched closely by the credit agencies who already have Japan in a negative watch position and susceptible to further outright credit downgrades. Currently, Moody’s and Standard & Poors rate Japanese debt as equally trustworthy as countries like Chile, Macau and Bermuda. These are drops in the bucket compared to the weight the Japanese economy brings to bear on world trade. Fitch is the only rating company still holding Japanese credit at A+.

Inflating the economy by selling government treasuries is also designed to devalue the Yen against the major world currencies and help fuel their export dependent economy. The Yen has strengthened considerably over the last few years trading from a low of 115 Yen to the U.S. Dollar in July of 2007 to as high as 75 Yen per Dollar this time last year. Currently, the Yen is trading around 84 Yen to the Dollar. Japan is the second largest holder of U.S. Dollar reserves behind only China. Therefore, it could require a tidal wave of selling to make a dent in their $1.25 trillion in U.S. Dollar reserves.

The trading scenario is the mirror image of, “Don’t fight the Fed.” Japan has the financial power Mr. Abe has the political power and the support of the Japanese people. This should manifest itself as cheaper Yen and higher yields on the Japanese Government Bonds. Therefore, I expect the 75 Yen per dollar high set last year to hold and would like to sell Yen at 80. Note that these quotes have been provided in the number of Yen per Dollar while CNBC and U.S. futures quotes will show the inverse, which is what percentage of a Dollar will one Yen buy. Currently, one Yen will buy .00186 worth of a Dollar. Be careful to compare apples to apples when checking market prices.

The next big piece of this puzzle will be the inflationary effect on Japanese Government Bonds (JGB’s). The previous yield high was made in 2007 along with the bottom in the currency. The JGB reaction to the election announcement was swift. The futures have put in a full bearish reversal bar on the monthly chart. This is the first one we’ve seen in this market since June of 2003. Adding to the power of the reversal is the double top formed with the current high nearly matching the June ’03 high to the tick. Looking for places to sell Japanese Treasuries and currency as part of a long-term trade would be well advised as the timing and opportunity for real political and monetary change happens far less than the politicians would have us believe.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Sharecropping in Greece

This week’s article is based on a piece I read by Michael
Hudson. He is a research Professor of Economics at the University of Missouri,
Kansas City and President of The Institute for the Long –Term Study of Economic
Trends. His writing is quite dense. I had his articles on one screen and
Mirriam-Webster’s online dictionary up on another. That being said, his basic
thesis is that the European Union’s design has allowed private banks to make
sub prime loans for individual countries’ internal development with little
thought as to whether they had the ability to repay them. Unlike our own sub
prime debacle, it is ending in foreclosure by the banks on entire countries,
instead of just individual houses. He calls this the, “sharecropper” model of
European lending that will create poverty stricken and dependent countries
within the European Union.

The first issue
he raises is with the globalization of the financial industry and its primary
purpose of collecting fees and generating revenue based on the maturation process
of the debt it services. Accounting processes in the last 10+ years have
evolved into a shell game. The idea, following Enron’s lead and supported by
major financial firms like Goldman Sachs, Chase and J.P. Morgan allowed private
banks to make loans large enough to subsidize governmental funding programs
like health care and infra structure loans by creating financial swap

The swap contracts they created are basically like
adjustable rate mortgages with the addition of a second variable. Obviously,
the first variable on an adjustable rate loan is the future interest rate. The
second variable is the foreign exchange rate. The value of the loan is
calculated at the time it is made but the repayment value would vary based on
the relationship between the currency in which the loan was made and the
currency that it is repaid with. For example, in 2003, the Euro and the Dollar
traded at the same value. A loan made in Dollars to the European Union of
$1,000,000 would carry a swap value of the agreed upon interest rate
fluctuation plus an agreed upon currency exchange rate fluctuation. The Euro is
currently worth $1.45. Therefore, the current repayment value of the loan could
have been cut nearly in half based on currency fluctuation. Think in terms of
controlling the new crop seed money.

The swap contracts they created allowed private banks to
lend money to foreign governments, which would be repaid through national
lotteries, airport landing fees, toll roads, etc. The banks profited and debtor
countries, like Greece, remained within the European union’s 3% budget deficit
rule because cross currency swaps were not recognized as official government
debt. The reality was that the accountants at the large institutions found legal
but, covert ways around the European Union’s Maastricht Treaty. The Maastricht
Treaty made no provision for financing individual countries directly by the
Union. The unintended consequence was a shadow lending industry that went
completely unregulated and spiraled out of control. Imagine the U.S. sub prime
debacle on a scale large enough to finance Greece, Ireland, Iceland, Portugal
and Spain combined! Hudson equates this to a land grab of national revenue
producing assets.

The second issue that Hudson raises is the process by which
the debt that is created by the banks and squandered by the individual
governments is then transferred to the general population for repayment to the
original lenders. The borrowing governments use the money received to expand
their balance sheets, which in turn allows them to issue new debt on the open
market. This debt is purchased by the large French and German banks that now
hold roughly 35% of Greece’s debt and can’t afford Greece’s inability to pay.

Germany and France then use their political clout to
engineer a European bailout (QE1 & 2 in the U.S.) to protect the banks and
people of their countries but, in actuality, saddle their own productive
economies with repaying a less productive country’s debt. French and German
taxpayers, unwilling to cover the debts of an irresponsible borrower force
austerity measures on Greece to punish them. However, raising taxes to pay back
the loans does more to damage Grecian productivity than to curb spending. This
places Greece in an even deeper hole forcing them to seek more bailouts to fund
nationalized welfare programs like health care, garbage removal, infra
structure maintenance and so on. This, controls the labor.

Finally, the European Union, as opposed to individual
lending institutions, offers to buy or, lease national services and landmarks
like, the Parthenon or their airports and roadways that would guarantee long
term loan repayment revenue streams. The banks would keep their profits and
remain solvent while Greece gets their own spending habits under control.
However, this process would also strip Greece of their primary national
industry – tourism. Consider this the, “land” portion of the equation.

The spiraling cycle of forcing people to pay more while
making less through controlling the seed money, labor and land is why Hudson calls
this subsistence the, “sharecropper” business model of the Euro financial
institutions, which he believes will end in revolt just like it did here in the

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

Reprofiling Greek Debt Boosts Gold and Dollar

Trading the markets is sometimes like being a relationship counselor. There are times when it’s easy to see how one thing done or said affects the other’s actions. We use a fancy term for it, correlational analysis. When the correlation is positive, both things move in the same direction and when it’s negative, they move in opposite directions. Pretty straightforward stuff like when the Dollar falls, gold climbs. That’s a negative correlation based on inflation. Similarly, the stock market rises as interest rates decline because businesses find cheaper money for expansion and capital equipment acquisition. Unfortunately, every good therapist knows that relationships change over time. These markets, in particular, are not performing true to pattern.

Fortunately, in the financial world, we have tools that let us quantify these relationships. Now, it’s true that over the last year, gold has rallied and the Dollar has fallen. However, over the last couple of weeks, both the Dollar and gold have rallied. I think there is a significant change in the underlying nature of their relationship that could cause this to continue throughout the summer.

The primary reason for the Dollar’s strength has not been the domestic economy. The strength should be attributed to the global fear of a collapsing Euro, which attracts money to the U.S. as a flight to safety. We’ve talked at length about the troubles in Ireland and Greece. Well, Spain and Portugal are right behind them. The global credit markets are already pricing in the pending defaults. Greek 10 year bonds are yielding north of 16% and Ireland and Portugal are both above 9%. This compares to the U.K. Gilt 10 year yield of 3.3% and the U.S. 10 year Note’s yield of 3.1%. The European Union is caught between balancing what the Union’s lenders will accept as payment versus what rights of autonomy the borrowers will relinquish to remain in the Union itself.

The new catch phrase is a, “reprofiling” of debt. This word isn’t even in Microsoft’s spell check. However, this invention by the European Central Bank is really a synonym for, “default.” They want to extend the maturity dates of Greek debt. The Euro has fallen 7% as we’ve hunted through Webster’s Dictionary for, “reprofile.” The reprofiling or, restructuring of Greek debt would seriously devalue the 50 – 80 billion the ECB has already contributed monetarily and devastate the value of the European Union’s political solidarity.

The same fear of a Euro collapse has attracted money to the gold market. This week, gold hit an all time high priced in Euros. Investors are looking for a safer holding facility for their liquid cash than the Euro currency can provide them with. This move has been extended as the ECB has chosen to cancel its June meeting while reprofiling studies are being completed for their newly scheduled July meeting. Consequently, there have been four trading days in the last ten where both gold and the Dollar have rallied more than half of a percent. This compares to six days in the last twelve months when this has happened.

The rise in the Dollar has also coincided with a flood of money into U.S. Treasuries and a decline in the U.S. stock market. Commercial traders are aggressively rotating their positions from stocks to bonds as the Euro Zone drama is playing out. This is taking the classic low yield/high growth stock market relationship and turning it into a low yield/no growth scenario more consistent with times of fear. We’ve seen commercial money buying 10yr Notes in six of the last seven weeks and selling in the stock indexes in each of the last four weeks.

Reconciling relationships means being able to cope with change and allowing the relationship’s participants to grow in their own directions. Being able to recognize these changes in the marketplace as they are happening requires a sound combination of reading the back-stories and quantifying the participants’ actions.

This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk of loss in investing in futures.

Commodity Market Bubbles

Defining a market bubble has become a bit like the moral right’s hunt for pornography sites like www.tubev.sex. They can’t quite quantify it but they’re sure it’s evil, it must not be tolerated and they’ll know it when they see it. Of these four qualifications, twenty years of chart study at least allows me to agree with the last statement. I’ve studied market bubbles from Belgian tulips to the Hunt brother’s cornering of the silver market and actively traded the tech bubble on the way up AND down. We traded the economic collapse of ’08, an inward bubble, as well as the commodity bubble that immediately preceded it. We’ve analyzed them mathematically through standard deviations and statistical analysis. We’ve read university studies, which focus on the psychological aspects of the markets’ participants and we’ve watched politicians blame it all on the speculators. Out of all of this, there are a few things that help us understand where we are now, and that is the key to investing.

There is a difference between an individual market bubble and a rising tide floating all ships. A summer drought or a winter freeze may push grains or orange juice into bubble mode through crop damage. However, those are individual market issues. An economic policy that devalues the Dollar in the face of growing global demand is the tide that floats all ships. The U.S. commodity markets remain the global commodity pricing mechanism. Therefore, all commodities priced in Dollars will continue to climb as long as our economy flounders, regardless of speculative trader participation.

Quantitatively, the only current market that may be headed towards the psychological bubble area is, silver. A recent survey of commodity bubbles, both up and down does provide us with some clues towards the identification of a bubble. Typically, we see moves in excess of 100% in less than six months. The primary focus is rate of change. Bubble markets have large moves over a very short timeframe.

The psychological aspect is the history of human nature. Trading bubbles have been reproduced over and over in academic labs. According to a study done at the University of Zurich, human beings do tend to learn from their mistakes. They found that subjects burnt by a bubble are two thirds less likely to be burnt by the second one. Unfortunately, several other studies on the human decision making process have concluded that once people have acquired enough information to make an informed decision, more information only increases their level of conviction – not their accuracy. We are just beginning to see an entirely new wave of market participants. Therefore, psychological aspects of trading will have to be learned again and again.

The growing global demand is just in its initial stages. We have seen the first leg of the new global commodity price norms. Old world Europe is struggling and China and India are both reining in inflation as best they can. A near term slow down will prove to be a huge buying opportunity in the commodity markets by new participants in Asia and India who have seen their incomes grow three fold over the last ten years and have money that must be invested to keep pace with their domestic inflation. They are already pushing the trading volume of overseas commodity markets to new volume records. Much of this has to do with the typically small contract sizes they trade, which broadens their appeal. Their volume is further enhanced by political systems that won’t allow their people to invest outside of their country. This eliminates cross hedging, which does minimize price fluctuations relative to value. Thus, a whole new population is beginning to fuel the bubble and subsequent burst cycle of their markets and financial education.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.