EURX Analysis - 13th April 2013

The time period between 2/2012 and 4/2013 we as well as most participants were focused on short JPY trades against a variety of G7 basket. There was nothing particular apart from one trade rese
arch published in last quarter 4/12/2012 on USD/INR where I highlighted some core structural issues in India and correctly forecasted a 52-56 range for next 3-4 months. I have not published it here but more than happy to send it over if any institutional client want to view it.  

While analyzing my charts over weekend which I usually do my eyes caught bullish weekly formations and again my gut was giving me ill feelings of something was fishy in the EUR markets. Almost every player I knew was bearish on EUR. I was sick off how many times I got messaged on  Reuters  EUR/USD was heading to 1.2000 and combined with that extremely bullish Dollar sentiment or biased crowd.  The issue is that I don't trade what I hear but I trade what I see and there is major difference between the two.  As usual my weekly stat arb EUR models were screaming higher. Further EUR/AUD, EUR/CAD, EUR/JPY, EUR/TRY, EUR/SGD were giving strong confirmations that market was statistically flawed and my confidence grew whereby a magnitude of analysis was adding up for a Long EUR trade.

On 13th April I issued a strategy to Buy EUR mentioning it to be cheap at current levels and market has severely underestimated the pair. The aim was to buy 1.2850-1.2950 range for moves towards 1.3600/3700. This was one of my boldest career defining move I will or would have ever made and would test my patience in next couple of months as I go against almost every trader I knew at that time.

What will happen next is history but if asked me now I could have technically fundamentally and statistically proved that it was a long trade. And this is not hindsight the evidence is here and its posted.

So how did it make sense fundamentally?

In my introductory post I mentioned how fundamentals reflect in chart but they are often misinterpreted. This is it can't get any better.

 The whole EU story was and still revolves around sovereign crisis and possible default speculations . This was evident when at peak of EU crisis sovereign bonds were dumped really hard.  Macro funds shorted Euros as proxy due to its high liquidity compared to peripheral bonds and so on.. but somehow crisis was contained and Greece did not default on its debt obligations and there was no contagion  effect.

On the other hand US had started spitting decent enough  economic numbers and market participants had started speculating Fed tapering on the cards. I personally thought that all the goodies in Dollar Index was priced in especially when it bottomed out in 5/2011 and been rallying since then trading at pre-QE levels.

To add in 2012 Dollar Index (DX) made 4 monthly attempts to crack higher through 84 and was not successful. Later on in 2013 it made another couple of useless attempts to break higher made everyone believe its heading for 90 and dumped.  Reserve Managers (RM) saw this wonderful opportunity to sell their dollars especially Chinese were on it left and right. Frankly if I was RM then would have done the same thing get rid of some of my excess Dollar reserves. 

Well coming back to my earlier point if the US started to grow i.e let me put a lot of emphasis on this .The world's largest economy has started picking up momentum so are we going to feel the positive spillover effect in rest of G7 space? Remember the opposite was also true when US went into recession right?

ECB did a great job eliminating the tail risks in EU and with the growth picture looking slightly better in US it made great sense to cover short Euros and ‘de-risk’ the EU default speculations. EU current account surplus improved dramatically especially peripherals which almost eliminated their deficits. I have argued on many occasions this year if the US recovers then the rest of developed nations which follow the suit. A similar case one can notice in UK economy where forward looking indicators point a balanced growth in services, construction and manufacturing.

Now what was needed was trigger point to sell or offload Dollars. Back in April-May I was aware that US fiscal debt negotiations in last quarter would poise a risk to US economy and put Fed in dilemma. Along with this was a last quarter election of new FED chairman. This is political risk and uncertainty in monetary policy at its best reflecting in Dollar Index.

At the back of my mind I knew if somehow Fed turned dovish on its July 10^th statement then the odds taper would happen in last quarter are very low and would support my Long EUR strategy.

On July 10^th there was blood on Wall Street ‘Spartacus’ style. I was in a comfortable position as my intra-day models were long EUR/USD and were loving the moves.

Couple of months later FX Concepts went bust and world class systematic fund based in London let go a number of its traders citing awful performance. This was just start as quantitative funds based in London and Cambridge took hits possibly due their systematic models not able to cope with volatility.

Not to mention this are the same quant funds which hire genius mathematicians and run sophisticated models to extract alpha.


Readers can download the report from the link below. If the link is dead send me message and I will post it again. The report is very basic  and as I always mention if any insto guys wish to see the original mail ( not that there is any difference apart from few typos which you would expect while working over weekend its the same stuff )
https://drive.google.com/file/d/0B6MwssNHtXgUdkc4RTY0cmRhVWs/edit?usp=sharing