Pre-FOMC mins Stat Arb Model Forecasts

Hello Traders,

Going into FOMC minutes my daily USDZAR, USDTRY, EURTRY AND DOLLAR INDEX models are indicating a slight bullish forecast. This forecast is valid for next 5-7 working days and I am expecting Dollar to pick up momentum on upside for this week going into mid-next week.(short term).

Also notable Kiwi daily stat arb has indicated exhaustion in uptrend and correction lower is due. Out of all the forecasts I like the USDZAR LONG trade 'smalls' at 10.90 stops below 10.80 for 11.20 types.

On the majors, few other pairs like EURUSD,USDCHF have indicated slight exhaustion in trend and support a mild Dollar rally. Will be surprised any major downside in Dollar today. 

best of luck guys

INR UPDATE

With regards to the Long EUR/INR issued on 13th Nov, think time is ripe to close it as the position is not feasible owing to cost of carry which has costed almost 3% even though the price reference level is almost same since Nov 13'.

Some of the drawbacks of shorting high yielders eh !

will keep updated if any other interesting opportunities come up.

A Contrarian Trader's 2 pips on EMFX

As a starters EUR/HUF has traded 310 as highlighted in my Nov 13 issue (Dec15 post) . Even if you managed to pick EUR/HUF on Dec15 you would have been sitting comfortable 4% higher as of now. So basically job done on EUR/TRY and EUR/HUF and the last pair which is still lagging is INR . I am going  to stop mentioning how TRY is getting hammered day by day as its pointless. Twitter will do that for you!

Lets  focus on TCMB, I expressed concerns about how the bank may hesitate to raise rates which could put their credibility to threat. This week they did it but as you would expect market saw this signs of desperation and weakness and local Turkish traders saw this opportunity to bank as much Dollars they could. Then came  SARB raising rates on ZAR. At this very point I was not aware they had a policy meeting until one of my good trader mate actually made me aware. The very first words which came out of my mouth were " I hope SARB doesn't do anything absurd by raising rates" They actually raised rates and the price action post rate hike was horrible.

Personally think emergency rate hikes do not pan out well when  slow growth,debt issues and political risks are looming in near term. Take an example of the brave attempt taken by MNB in Oct 2008' by raising 300bp on Forint.  Post rate hike EUR/HUF lost approx 10% and in the next few months carried with the overall bullish trend and made new highs erasing all the gains post rate hike. Of course some may argue it was a totally different situation, but does it really matter ? Looking at how market has reacted to ZAR and TRY it is very similar to how market reacted to HUF in the past. Infact in the case of USD/ZAR it made a new high post rate hike right away. Charts below Weekly EURHUF, 4H EUTRY and 1H USDZAR

For now I have shifted my focus on Scandies and CE4 and by the way HUF traders were clueless yesterday. Again a classic example of fundamentals and sentiment reflect in charts if interpreted correctly.

Best of luck traders!

DX outlook 2014

Just finished creating my 2014 outlook for Dollar . The report is bearish Dollar at least going into Q1 and Q2 and is path dependent into Q3.

Also added a bullish AUD cross note in my report and I expect AUD crosses to remain bid or find interest atleast till Feb end in Q1. This is inline with my tweet on 6th Jan where I highlighted AUDUSD,AUDCNY,AUDCAD AND AUDNZD weekly stat arb is exhaused or in other words Aussie selling is overdone and expect short covering in AUD.

I will publish my report here when time is ripe.

Don't let Turkey spoil your Xmas ' Traders ' - The Lira Conundrum

I think it could not have been better to finish 2013 by year end note mentioning that TRY has been catching up with INR in the most 'Battered EMFX League 2013'

The midyear year report was the tip of the ice berg and highlighted  major weekly  formations indicating a bullish breakout. Later on in last quarter again the pennant formation was highlighted on Nov 13th accompanied by my tweet on Nov 26th.

The most striking feature was my stat arb was heavily bearish across the board TRY against EUR, USD and MXN.  Infact stat arb went long MXNTRY on 17th Dec " 0.1571 as tweeted and is up approximately 5% since then.

Just name is fundamentally, technically and statistically the TRY was doomed . Classic example how fundamentals reflect first in prices and charts and depicted/interpreted later. TRY is in real trouble . Economists have argued real interest rate is substantially lower relatively to other EM however what is/was underestimated is the political risks building up in Turkey.

Turkey's Muncipal elections and fate of Erdogan regime . Winter sets in to Turkey and should keep the CA under pressure due to Crude imports.. ( Just intuitive haven't gone that deep into statistics ) and Fed's taper game all point to a negative TRY. Lastly TCMB in order to raise rates has to ovecome the pressure from Turkish higher interest rate lobbies ahead of the elections which would put the banks credibility at threat.( if it fails to do so)

Personally think TRY will remain under substantial pressure relatively against the remaining EM until 1st Quarter 2014 and should   appeal to macro traders to add in the short basket against other EM/DM basket longs.

Also a little disappointing was Long EURHUF and EURINR which have not moved as I expected but the losses are little and gains are more and that is what matters. So will keep an eye on this pairs and update accordingly.

The smart central banker - RBI's Rajan

Reserve Bank of India (RBI) surprised majority of market participants by keeping rates unchanged to 7.75%. Whilst I wasn't surprised, I have to credit  Rajan for his smart move. It makes great sense when taken into account following factors:

>As a CB assess the FOMC statement today and its impact on EMFX especially USD/INR volatility.

> Assess the political risks arising due to elections and thereby the investors sentiment affecting equity and bonds flows.

> Analyse the inflation trend for couple of months into next year.

> In short keep master weapon 'rate hike' as the last option in its arsenal.

USD/INR now heading for crucial resistance of 62.20 after basing on weekly 60.70 support line. My stat arb still  likes higher USD/INR on weeklies.

Gods of Arena : Modi & Kejriwal

Narendra Modi and Arvind Ketriwal hereby I describe them as Gods of Indian political arena who will dictate the future of Indian politics and possible transformation into a more investment friendly emerging market.

Arvind Kejriwal (AAP) an ex- IRS officer and  a graduate of prestigious IIT,  demolished Congress in Delhi elections is a smart  and aggressive common man trying to tackle corruption and the thick layer of bureaucracy in India. He is hope to millions of young Indians especially in Delhi and has influenced heavily others in rest of India.

On the other hand we have Narendra Modi (BJP) who is what I call the CEO of Gujarat. The master mind in getting things right in a systematic way. His allies admire him and the opposition envy him for his superior project management, leadership skills and popularity. Media argues Modi has not done anything spectacular but I can argue equally a million times saying Gujarat state is relatively in a better shape politically, economically and security wise. I admire him for his vision and for his ability to meet his targets towards completing  staterun projects which is a rare occurrence today amongst  Indian leaders.

The above mentioned leaders have a very different personality but have similar mind set and that is to eradicate corruption and to revive growth. The common Indian man associates Modi with change and foreign investors see him as a route to liberalized reforms to invest in India.

Few weeks ago I issued a bullish note on USD/INR citing election risks and negative sentiment revolving around EMFX  due totapering risks. I still think there is political uncertainty which would weigh on INR.


 >  Big states like Bihar and UP which share a massive 120 parliamentary seats of the 543 will dictate how likely BJP will form a majority . Whilst I don't believe the poll system in India due to sample size and methodology issues , the poll indicates BJP is likely to secure 1/ 3 of 120 seats in the above mentioned states. If this is true then the other side of equation says BSP,JD and SP are to take a hit which reflects the change of sentiment shift from dominant players(BSP,SP,JD) to BJP.

> My market intelligence in this states has made me aware how Modi fever is picking up in Bihar and UP but this is all speculative and has a factor of uncertainty built in.

> In my optinion  market especially local funds  are awaiting how BJP performs in UP, Bihar and possibly AP and pump more investments into BSE. This is going to be a very big game changer and possibly even make me revisit my USD/INR forecasts.

> Fed's taper will weigh on INR along with the expiry of  currency swap facility nearing in Feb between Oil corps and RBI.

> The food inflation was a major contributor for the spike in inflation and immediate response  by RBI to hike rates. This is a structural issue combined with  imported inflation( Potash) due to weak INR. While structural issue does take time to be solved the imported inflation could be contained by capping and further appreciation in USD/INR. RBI has hiked rates  compromising  growth and I seriously think this is a issue if inflation gets out of control.

> I will end the note by mentioning that  tapering sends a positive signal to global investment community i.e  Fed's confidence of growth reviving in worlds largest economy. The dis inflationary environment supported by lower commodity prices should stabilize the inflation in emerging countries and support to more balance outlook for world economy in 2014. Hence it would make great sense that the climax of tapering story  ends with EMFX buyers stepping in i.e growth is bought.