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Carrytrade

The Rand in the rocky credit markets The economic calendar is wild this week so I thought it would be best to do a deep fundamental dive into the USDZAR . All the attention will be on the Federal reserve tomorrow and whether or when they will pause their rate hikes. We need to look past the hype around the interest rate and the “pivot" narrative. Focus should however be on how the markets will cope with the Fed’s liquidity drain and how it will impact the future price of money ( ie . Interest rates). Before we kick-off, correlation does not imply causation... I’ll start by explaining the chart you’re looking at. What you’re seeing is the positive correlation between the USDZAR and the difference between the South African government bond 10-year yield (ZA10Y) and the US 10-year treasury yield (US10Y). The interest rate differential is referred to as the carry trade potential. Investors can borrow money on the cheap from developed low-risk markets and invest the borrowed money in riskier destinations to earn more interest. The interest rate difference is then pocketed by the investor. The preferred vehicle to capitalise on the interest rate differentials between two locations are government bonds (they are low risk and liquid). The reason for the positive correlation between the USDZAR and the bond yield differential is because when there is risk-on sentiment in the market, investors tend to move funds out of the safety of US treasuries and into riskier assets. The sell-off in US treasuries causes US10Y yields to rise (decreasing the bond yield differential), and the rand tends to appreciate in risk-on phases of the market, citrus paribus. (Decreasing bond yield differential; USDZAR decrease due to rand appreciation). Conversely, when investors are risk-off they run to the safety of US treasuries. The buying of US-treasuries lowers the US10-year yield which increases our bond yield differential. We all know how rapidly the rand can depreciate in risk-off phases when the liquidity wave pulls back to the US, leaving the rand on the rocky shore. (Increasing bond yield differential; USDZAR increases). Our strong correlation however weakened in August 2022 when the US 10-year yield rocketed higher after the Fed started their hiking cycle. Let’s zoom in on the Fed since its Fed week. The most important chart in the market , the Fed’s balance sheet: www.federalreserve.gov . The Fed has so far tapered roughly 5.52% off its balance sheet since April 2022. The Fed is selling treasuries to taper its balance sheet and to soak up liquidity from the market (if there will be enough buyers, only time will tell). This is rand negative. Now let’s get to where all this week’s focus will be, the Fed’s interest rate decision. The Fed is expected to slow its rate hikes to 25bps this week and push rates from 4.50% to 4.75%. The Fed tends to follow the US02-year yield (US02Y) as guidance on its interest rates and it seems as if the US02-year yield has topped out between 4.75% and 5.00%. The Fed pause seems near, and the latest inflation figures from the US supports the narrative that the Fed has managed to cool inflation. The most concerning thing in the market currently is the inverted yield curve: History doesn’t repeat itself, but it rhymes. For the Fed to normalise the credit markets it will have to pause rates. That is usually when something the market breaks and the Fed is forced to cut rates and inject liquidity into the markets. When the Fed pushes easy money ( QE or whatever buzz phrase they'll use) into the market investors rotate from longer dated bonds to shorter dated bonds. To conclude, if and when the Fed pauses its rate hikes, the US10-year yield will melt higher which could be rand positive based off our correlation analysis. Just have popcorn (and gold , silver and other real assets) ready for when the Fed is forced to cut rates/ pivot because that will be caused by arguably the biggest credit market implosion in the history of fiat money. To end off I leave you with the words of Zoltan Pozsar: "commodities are collateral, and collateral is money."
by Goose96
Position Trading CHF/HUF (short) as a Carry Trade!The overnight rollover for this pair is so high and it's on point with the trend that I'm going to do a position trade with this pair for a couple months. A couple days holding this pair will pay for the spread. I'm just trying to find a pair to hedge with this pair so i can limit any losses that may incur but yeah the overnight swap for going short is ridiculously high but the only problem is the volatility due to it being an exotic pair. Hungary is also not doing to great economically so it will have to be watched closely, but as long as i can hedge a little bit of the exposure it would put me more in a peace of mind to do this Carry Trade
Short
by JasonLeighton
High Risk, Long Term Carry Trade! TRYJPY!This is my high risk, long term carry trade for 2023 (opened in 2022, looking to add to my position further). The swap rate is very attractive - to provide some insight, I have received a 3% account increase since opening my first long position in 2022, through daily interest receivables. The Fundamentals... Turkey has potential. Exports are climbing. The country needs more stability and greater global confidence - Turkey is greatly lacking both. I believe that the currency is so heavily short, that any sign of monetary policy change could cause the Lira to rocket. Potentially creating some large volatile upside moves. With the possibility of a global recession, the Lira could also see buying momentum, as emerging markets often perform well during times of international recession. Current Technical Reasons... Price is nearing all-time lows and daily horizontal support. TRYJPY is also testing bearish channel support area. Don't get me wrong, the Lira could fall much further - it has been in extreme decline for around 15 years! This is considered a high risk trade.
Long
by Samuel_Morton_Trader
1
EUR/JPY - BUY SET UP ON ECB RATE HIKES The EURO now sits under 138.000 on the exchange rate, a key resistance level that will now surely break after European Inflation hit 8.1% for the month of April 2022, igniting the debate about whether the ECB should be raising rates at 0.50% increments instead of 0.25% increments as signaled by Christian Legard. With European Bond Yields climbing and paying a premium over Japan, the EURO will likely continue to strengthen against the YEN as interest rates rise in Europe. The overnight carry trade will start to become profitable for the EURO into 2023, which is likely to attract investors into buying the currency pair.
Long
by KayansMarkets
EUR/CAD - Long Set Up As ECB Signals Rate Hikes Are ComingThe EURO is likely to strengthen against the Canadian Dollar as the European Central Bank signals interest rates are going up in July and September, to move the overnight cash rate from -0.50% to 0.00%. The reason the EURO will strengthen is down to the fact that interest rate differentials will narrow from the market's previous expectation, so investors who are short EUR/CAD will likely look to cash in on the carry trade as it's now hit its peak unless the Bank of Canada goes further then markets expect with rate hikes. Oil prices are also a bullish beneficiary to the Canadian dollar, but Oil looks to have peaked since it hit $130.00 on March 8th 2022.
Long
by KayansMarkets
NZD/USD - BUY SET UP AS INTEREST RATES IN NEW ZEALAND RISE We are highly likely to see a strong recovery in the New Zealand Dollar Against the U.S Dollar as interest rates in New Zealand continue to rise. Markets expect the Reserve Bank of New Zealand to raise the cash rate to 3.50% by year-end, which will be a premium 0.75% to 1.00% Interest rate over the U.S. This means any investors holding short positions in NZD/USD will lose money holding the position open overnight. The U.S Dollar has been strong in recent weeks as stock markets have fallen due to the Federal Reserves' commitment to raising interest rates aggressively to contain inflation running at 8.30%. When stock markets fall globally, investors historically sell international currencies and flood into the safety of the U.S Dollar, as its the worlds reserve currency. However, when stocks recover as they always do, investors will quickly sell dollars and move back into international currencies as they invest globally in equities again, causing the dollar to weaken in exchange rates and push up NZD/USD.
Long
by KayansMarkets
Dear Elon MuskDear @elonmusk : I have heard you are facing a huge tax bill. However, there is an instrument which can help you make money. It is NZD, New Zealand Dollars, as known as Sheep Coin and Kiwi Coin. I know you like to find profit from the trips of coins to the moon. I think nzd is a nice instrument, but it is facing offensive spam from hostile market makers. The news writters gave us two execuses. One is covid19, especially the emerging B.1.1.529 variant. I don't think so because New Zealand is one of countries encountering low impact from covid19. New Zealand is far away from Europe, Asia and America, so people are less willing to travel from and to New Zealand. The other is fear of Fed taper. I don't think so either because nzd is in the progress of increasing interest rate. Although Fed may consider speed up taper, they are still in the qe state. I only believe two reasons. One is New Zealand may spend a lot of money to buy oil. The other one is spam from market makers. It is because a lot of investors know to buy nzd, so market makers try to make us unprofitable. Conclusion Can you help us punishing those market makers and bring the justice back to the nzd investors? Best Regards clocks156t174 and other nzd investors
Long
by clocks156t174
Carry Trades, Margin Rates and all the FakesFor some strange reason the retail trade still appears to believe that the good old stand-bys are working as carry trades" ( AUDJPY , NZDJPY , GBPJPY , etc.) The fact remains that today, those don't even make the Top 5 of professional traders' (e.g., the industry) preference list. Interest rate differentials combined with existing margin rates make most of the majors crosses a very unappealing proposition as far as carry trades are concerned. Because of this the industry has moved on, quite some time ago. (As is the nature of the present, speculative bubble.) As for the top 5 of the majors, it's mostly about the US Dollar ; 1) USDCHF 2) USDJPY 3) EURUSD 4) NZDCHF (This one is likely to drop a few places, soon.) 5) CADCHF Then, there is the rampant "interest" (i.e, speculation) in all things BRIC vs. G10, for reasons which should be self evident. (Interest rate differentials, capital flows, etc.) I.e., MNX, CNH , BRL , ZAR , TRY versus the EUR, JPY and the USD. Thus, if one happens to be looking for volatility and low-hanging fruit out there, these FX pairs are deserving a fresh look. (They are volatile, though thus, be prepared!) Here is the "Central Bank Score Board"; ------------------------------------------------ - Swiss National Bank -0.75% - Bank of Japan -0.10% - Federal Reserve 0.00%-0.25% - European Central Bank 0.00% - Bank of England 0.10% - Reserve Bank of Australia 0.10% - Bank of Canada 0.25% - Reserve Bank of New Zealand 0.25% - Central Bank of Brazil 2.00% - Reserve Bank of India 4.00% - Reserve Bank of Russian Federation 4.25% - People's Bank of China 4.35%
by Nemo_Confidat
USDJPY <-> The World; Carry Trades, Safe Havens on the VIX ScaleThe Title Chart is a representation of the impact of each 1% change in the (SP500) VIX on various currencies' (and Gold; Bitcoin) to tend to more (or less) toward Risk (instability) or Safe Haven (stability) characteristics . I.e. It depicts the relationship between market uncertainty and exchange rate movements of safe haven currencies (and currency "equivalents") An important note on: Context! View this article in the light of two, undisputed facts; Margin debt – the amount of money that investors have borrowed in order to buy stocks – is now at the highest level in history, not only in absolute terms, but also relative to U.S. GDP. The present ratio of U.S. total equity market capitalization to GDP is 2.63. The historical norm (not the low!) is 0.78 . - Which is about 70% below the current level. In light of the above facts the central question remains the same; Can business as usual continue (and for how long?) or, is there is a global, catastrophic financial collapse on the horizon?... You decide. (This post may help; ) The remainder of this article is based on various notes and research, taken at a RIETI Conference (Research Institute of Economy, Trade and Industry), a couple of years ago - before the Covid Pandemic. However, I shall omit most (if not all) of the technical details, calculations and such here, for brevity and clarity's sake. Introduction The Japanese yen and the Swiss Franc are often called a safe haven currency—a currency that appreciates when the risk-averse behavior of global investors and the uncertainty of economic policy and outlook increase, while the U.S. dollar is regarded as the most reliable international currency as an anchor. The safe haven status is usually observed for a country that has the current account surplus, low interest rates—the funding source of carry-trade opportunity—, and the investors’ perception as the safe-haven currency, resulting in suffering from the deterioration of the trade balance during a crisis. That may improve the trade balance of the country’s trade partners and competitors, especially if their currencies are vulnerable to a shock. The yen tends to rise during periods of increased financial market volatility. This tendency—clearly evident when the currency surged after the Brexit shock—has strengthened since mid-2015. While widening yield differentials between the U.S. and Japan are a force to weaken the yen, the currency is vulnerable to sudden gains on higher risk aversion The Chinese renminbi (CNY) is a rising star. Its internationalization is on the fast track .The renminbi’s inclusion into the SDR basket represents its internationalization, making the renminbi a reserve currency alongside the USD, the JPY, the EUR, and the GBP. Still, the renminbi was depreciated by 4% between its announcement on November 30, 2015 and actual inclusion on October 1, 2016. Recent political uncertainty generated unexpected shocks—from the U.S. presidential election to Federal Reserve interest rate decisions and political events in Europe—that could affect sentiment toward the yen, the renminbi, and relatively vulnerable Asian currencies, increasing safe-haven demand for alternative assets such as gold and bitcoin. The yen’s safe-haven status may signal in advance shifts in risk appetite in the foreign exchange market. The skew in risk reversals on yen-dollar currency options, which turns negative when bets on yen appreciation outweigh bets on depreciation, tends to follow, or is at least associated with, the index. For example, 12 weeks after the start of a VIX spike, net non-commercial positions on the yen on the Chicago Mercantile Exchange are 20 billion U.S. dollars longer than would be the case absent the rise in the VIX. In the European sovereign crises of 2011, the yen was purchased aggressively as a safe asset3 and finally reached the historical high value, 75.54 yen per dollar and remained around 80 yen. Thus, just after the East Japan Earthquake and the meltdown of nuclear power plants, the highest value of the yen is hard to be explained by economic fundamentals. In January 2015, the Swiss National Bank (SNB) abolished its exchange rate cap against the euro, meaning that the SNB stopped intervening by purchasing the Swiss franc against the euro. As a result, the Swiss franc was appreciated against U.S . dollar by 30% within 10 minutes . At the same time the yen and the Singapore dollar were appreciated by 1% as investors needed to sell the euro and buy some safe currencies instead of the Swiss franc that was limited liquidity and capacity compared to the euro. So, not only the yen and the renminbi, but other currencies in the Asian emerging market may be in transition to the safe-haven status. Here, one tries to measure whether the yen, the renminbi, other currencies, and alternative assets have a safe-haven or vulnerable status. Introducing long-term and short-term gauges help judge if the safe-haven status is temporary or consistent. The results shows that the yen consistently has the safe-haven status, the renminbi temporarily obtained the safe-haven status in early 2010, but has been returning to a vulnerable currency. Increasing political uncertainty in the global market and weakness of the renminbi may increase demand for traditional and innovative alternative assets, though the size and liquidity of the markets haven’t developed well, yet and they are vulnerable to regulatory changes. A bitcoin price surged in late 2016 as the renminbi depreciates, but it tumbled to $789 on January 11, 2017, down 28% from a peak of $1,091 on January 4, 2017. The proximate cause – signals from China’s central bank that they are paying close attention to irregularities in the market. The still relatively small size of the market makes bitcoin impractical as a channel for large-scale capital flight. Gold could be considered as a good asset in the diversification of Chinese portfolios. Wong and Zhu (2015) find, however, it is only for risk-seeking investors and in crisis periods on the Shanghai Gold Exchange in the diversification of Chinese portfolios. So, there are very limited indications that bitcoin and gold could be presently regarded as a safe-haven assets, and while their safe-haven tendency might be increasing, it is particular and limited to relative to the renminbi, under high policy uncertainty. Safe Haven Trades - Short-term Perspectives There are standard and widely available models that captures the safe-haven status of a currency in the short-term and they rely on the assumption of capital flows driven by excess returns from the currency carry trade, rather than uncovered interest rate parity (UIP). The carry trade hypothesis defines the currency carry trade, which consists of selling low interest-rate currencies “funding currencies” and investing in high interest-rate currencies “investment currencies.” They find that carry trades loses money on average, in times of rising VIX. While the UIP hypothesizes that the carry gains due to the interest-rate differential is offset by a commensurate depreciation of the investment currency, empirically the reverse holds. The investment currency appreciates a little on average despite with a low predictive R2 (Fama1984). This violation of the UIP – often referred to as the “forward premium puzzle” – is precisely what makes the carry trade profitable on average. To be able to successfully solve the UIP “forward premium puzzle” (successful carry trade), the addition of a gauge of market risk sentiment to predict the future spot exchange rates is essential. To predict the change in the expected exchange rate is usually explained by a change in interest rate differentials and the market risk sentiment. To capture the impacts of a change in the market risk sentiment on exchange rates, a rolling OLS regression of a daily change in the VIX and the two-year yield differential between local currency and the U.S. dollar on a percentage change in local currency per dollar is used. Normally, The VIX is a good measure of investors’ risk sentiment. Increases in the VIX are associated with higher volatility in Japanese and Germany stock prices, as measured by the Nikkei VI and VDAX, as well as in the yen’s exchange rate to dollar. The VIX correlates, under normal circumstances, to the Nikkei VI at 0.83, to the VDAX at 0.87 and to implied volatility on 1- month at-the-money yen-dollar options at 0.71, with the addition of the two-year government bond yield differential. A standard model would go something like this; dLn(LCY/USD) = a+b1d(USDLCY_2Y)+ b2 𝑑(𝑉IX)+e where "LCY" means the local currency, USDLCY_2Y is two-year government bond yield differential, the VIX denotes the implied volatility of S&P 500 index options6, "e" is an error term. The UIP assumes the sign of the coefficient of USDLCY_2Y is negative, while the carry trade hypothesis sees its sign positive during a normal period. So, the determinants of its sign are answers to an empirical question, rather than a theory. The coefficient of the VIX is defined as the Safe-haven Currency Index (SCI) and assessed the safe-haven status as follows: SCI > 0: Period and country specific "safe-haven" type tendency. SCI < 0: Period and country specific “vulnerable currency" type tendency. SCI = 0 or insignificant: exchange rate movement doesn’t follow a specific tendency. Safe Assets – Long-term Perspective The safe asset indexes indicate mostly three currencies – the Swiss franc, the yen, and the dollar – out of the 13 currencies which mormally maintain safe-haven status. Although the Swiss franc has the strongest safe-haven status on average, its status has been weakened from 2007 until 2011 – the period of the Global Financial Crisis and the European Sovereign Crisis. That is likely because Switzerland has suffered from rapid currency appreciation against the euro and thus, its safe-haven demand relative to the dollar seemed to be limited. In contrast, growing dollar demand during the crises had strengthened the dollar’s safe-haven status. The yen has consistently kept the safe has status during previous risk-off episodes. However, the currency status of some currencies has been switching between a safe-haven and a vulnerable currency. The British pound had had the safe-haven status until early 2000s, but it fell into the vulnerable currency status from 2007 until 2015, followed by a rapid depreciation due to the Brexit shock in June 2016. On the other hand, the Singapore dollar was the vulnerable currency until 2011, turning into the safe-haven currency around 2011. Thus, the safe-haven status doesn't necessarily last forever, and it does change overtime. Higher frequency data provides the detailed transitional status in the short-term perspective. The safe-haven status seems to be associated with the internationalization of the currency. The dollar has about 90% of the total share (200%) of turnover of Over-The-Counter (OTC) of transaction from 1995 until 2016. The yen’s share is about 20% throughout the same period. The shares of the European currencies such as the euro, the pound, and the Swiss franc have peaked in 2001; they have been gradually shrinking ever since. In contrast, the Asian currencies have been consistantly emerging, in the meantime. The share of the renminbi, the Singapore dollar and the Won reached 4%, 2%, and 2% from 0%, 1%, and 0%, respectively. Safe Haven versus Vulnerable Currency – Short-term Perspective Uncertainty represented by the VIX affects exchange rate movements on a daily basis, given limited fluctuatuons in the two-year interest rate differential between the local currency and the dollar. Zero interest rates are applied for alternative assets. The Yen The Safe-haven Currency Index suggests that the yen has kept its safe-haven status during the global crises. The results of the ordinary least square rolling (OLS) regression in daily data supported this scenario. The yen’s safe-haven status has been held firm since 2007 except for a period of the aftermath of the Great East Japan Earthquake and the downgrade of the U.S. sovereign rating d by Standard and Poor. Still, even when the yen had its vulnerable status period, it still wasn't significant. Since market participants tended to expect higher possibility of massive monetary easing as the part of the Abenomics in late 2012, the yen’s safe status has been strengthening. The index shows that each 1 percentage point rise in the VIX is associated with a 0.13% appreciation in the yen as of January 26, 2017, while 1 percentage point increase in two-year interest rate differential between the U.S. and Japan is accompanied to an 11.4% appreciation in the yen. The negative coefficients of U.S.-Japan interest differentials held virtually for ythe entire period. Removing the yield differentials strengthens the absolute impacts of a change in the VIX, but it doesn’t change the robustness of the yen’s safe-haven status. These results support the carry trade hypothesis rather than the UIP. A shift in the monetary policy framework helps explain a change in the yen’s safe-haven status. Lower interest rates increase opportunity for the carry trade, strengthening the save haven status. The structural breaks for the safe-haven status are tested with the Schwarz criterion in global information criteria. The test signals July 21, 2006, August 31, 2010, and January 31, 2013 as the timings of structural breaks. These dates are relevant to significant changes of monetary policy framework in Japan. The Bank of Japan lifted the quantitative easing policy in March 2006 and the zero-interest-rate policy in July. The BOJ introduced ‘comprehensive easing policy’ in October 2010, and the BOJ introduced asset purchase programs in April 2013. The coefficient of the VIX was around zero in late 2012, but it dropped to -0.25% in early 2014. Further monetary easing appears to enhance the yen’s safe-haven status. During the same period, Japan’s net foreign asset relative to the GDP has been highest in the world, but it has decreased in the dollar terms. Consequently, investors’ risk appetite and their perception for the yen’s safe-haven status would play a vital role in the determination of exchange rate movement. The strength of its status may rely on excess profits from the carry trade rather than economic fundamentals such as net foreign assets and reserves. The long-term government bond yields contain more risk premium than short-term yields. Still, the yen’s safe-haven status, which reflects invertors’ risk appetites, is robust even if adding in a change in the yield curve: the ten-year, two-year spread between the U.S. and Japan. An increase in the spreads means the U.S. government bond yield curve is getting steeper relative to the Japanese government bond yield curve. The coefficient of the VIX remains significant overall even if a rolling regression is implemented with the yield curve variable. These results suggest a higher level of VIX predicts higher returns for investment currencies and lower returns for funding currencies, and controlling for VIX reduces the predictive coefficient for interest-rate differentials. That is consistent with the carry trade hypothesis. Renminbi’s Shift to Vulnerable Currency Status The SCI suggests the renminbi is a vulnerable currency except the period of 1997-2001. As capital flows from and into the Mainland China are restricted its interest rate differential to another currency and the VIX haven’t well tracked the movement of onshore renminbi (CNY). In order to capture the investor’s risk perception under uncertainty, the offshore renminbi (CNH) might be the more appropriate gauge of the safe-haven and vulnerable status. In fact, during the risk episode such as the U.S. sovereign credit downgrade, CNH tended to depreciate more rapidly than the CNY did. The tests for safe-haven status of the CNY are neither stable nor significant, not only against the Dollar but also the Euro. In contrast, the CNH’s vulnerable currency status against the dollar and the yen is readily observable and consistent. All the while its status relative to the Euro was regarded as a safe-haven until April 2014, significantly shifting to a vulnerable currency by May 2015. These results are consistent with structural breaks, overall. Alternative Assets: Gold and Bitcoin Those two asset classes reamin relatively fractional to global risk assets and stock market market capitalization. As of this writing, they remain miniscule to even consider them as alternatives in light of the $75-$220 Trillion (depends who is counting) total, unfounded, global liabilities. Conclusion All of the above suggest that the Yen is a safe-haven currency as well as safe asset and it's status as such is unlikely to diminish in the foreseeable future. Its safe-haven status is stronger on average than other safe-haven currencies such as the Swiss franc and especially far outpacing that of bitcoin and gold. The offshore traded renminbi (CNH) maintains a very much vulnerable status to the U.S. Dollar and the Japanese Yen and this is has also minimal impetus to changes in the foreseeable future. Higher market uncertainty with policy swings may increase safe-haven demand for alternative assets such as gold and bitcoin but there are certainly no tendencies at present that, given these alternatives' very limited liquidity, they would factor as substitutes for the Yen or the US Dollar in the foreseeable future.
by Nemo_Confidat
3
The Secrets to Forex & Seasons GreedingsThis section is on seasonality and follows the prior section on carry trading conditions. I strongly recommend reading the prior parts for full value. This is (pt. 5) in chronological order. And yes, this will be on the test. ----------------------- You probably have someone in the immediate or extended family that considers herself (let's be honest) an expert shopper. The coupons, the early trips, the economy size containers, the 2 for 1 dealerinos, etc. Gets the seasonal produce or vegetables because they're cheap. Skips Black Friday, shops Cyber Monday. Didn't run out of toilet paper during the pandemic, etc. Gets all the Christmas gifts shortly after Thanksgiving, or in early December. And this expert shopper will repeat many of these decisions each year around similar times or with similar products. Doesn't matter what holiday, culture, or country involved, the behavior is parallel. I'll cut the music and get to the important stuff: Shopping is where the average normie experiences the pricing influences of seasonality. Not everything is 'worth' the same price all year round, not everything can be produced on any given day of the year, and not everything is consumed on any given day of the year. There are private and public laws and behavioral standards tied in as well. Everyone knows this as they experience it in their general robotic lives. But retail traders tend to forget this when it comes to trading and investing. So what's the difference between seasonality and similar-sounding concepts like cyclical trading or using historical models? Part 1: Solar Calendars Seasonality is a kind of factor (like in factor investing), it's a more rigid concept derived from historical data. It tends to be cyclical, but the timing is not arbitrary, it's formatted into the gregorian calendar . This calendar is based on solar timings and their effects. Solar timings were once one of the great wisdoms coveted by our ancient ancestors, building incredible structures to predict these seasonal events. They didn't do this for fun. In our current era of surplus, we can tik tok our way to prosperity, but in earlier eras, maximizing food and shelter was a life or death strategy. The solar calendar predicts these events with relatively decent scientific accuracy. It offers certain outcomes. Think about trading and its challenges. Uncertainty is the norm, so anything certain is inherently valuable. Now, how does that fit into currency exchange? Businesses, major exchanges, and governments all rely on this calendar for their standard operating procedures and for risk management. What do those three things have in common? They involve people, and they involve lots and lots of money. They all share the same green destiny. Part 2: Are These Titles Useful? I said this a million different ways in the first 2 parts. Look, there are certain psychological biases that greedy people at the top share, due to their upbringing, income bracket, and nationality, among things. Those biases help make seasonality matter, largely due to vacation timing, consumption season, and tax events these wealthy people will into relevance out of thin air, like a magician. This is why seasonality can still generate an edge for you, the pitiful retail trader. Now, as mentioned in pt. 3, we are still focused on long-term trades, traders that hold for many days, weeks, or months. Does seasonality have big changes for intra-day traders (who play on nightmare difficulty)? I'm not going to write a book here and detail every answer, you need to do your own research. Or you can just wait for me to write the section on intra-day trading. Or you could spend your whole life serving coffee. Please remember to follow me so I don't have to see your awful latte art. Part 3: Dead Presidents Okay, here are some secrets from the money magicians: There are seasons for all securities. It's important to understand that seasons for stocks and commodities affect currencies. I had to check google to make sure this is up to date but it appears you still need cash to buy or own things. And we're in the cash game. Ever wonder why dead presidents or national heros are always on the faces of fiat currency? As described in the last part, they are country-level assets, created for tax and liquidity purposes. Those faces are reminders of your most sacred civic duty: paying taxes. Did you know that all people have to pay taxes? Including wealthy people? The most powerful person on earth (probably) pays taxes. And, based on nationality, have to pay taxes at the same time each year? That is a rare form of certainty related to markets. Part 4: The Spice Must Flow Tax season, especially the US tax season, is big because lots of cash (usually over 80%) flows through forex as USD. Most of the wealthiest people in the world hold a lot of USD. And a majority of them live in the US, as tax residents or as citizens. As a result, it has an effect on USD rates towards the end of the year, when investment portfolios are rebalanced to try and take advantage of the tax system with whatever strategy is legally available. Indeed, it can be complicated, and I recommend doing your own research, something you will have to be competent at if you want to make a living for decades into the future. The net assessment is that if you are trading towards the end of the year, you need to be mindful of how the US tax season will affect your potential positions, and fit that into your risk management evaluation. Variables like earnings seasons, and other business or industry dependent factors serve as strong influences. After all, they are the ones using most of the money... currency isn't just there to collect for rent and spend on groceries, it's to create and capture value, the mission of all corpos. The money must flow. JUST THE TIP: When looking at seasonality, or any other global macro like news or fundamentals, it's important to think in terms of DEMAND. Does xyz increase demand for a currency (relative to the pair)? The supply does matter, but where many retail traders (and especially cryptocoinies) tend to get pink in the face, is when they focus almost entirely on supply in the evaluation of a currency. Demand is principally important to currency, and is the primary reason why consensual pegging agreements and the gold standard failed last century. Instead of reading a book on it, just read this: the demand for the currency of a few key nations is consistently strong due to loosening international finance standards that allow the newly minted wealth of developing world investors to gravitate towards developed country assets to hedge against local economic turbulence. Oh yeah and the petrodollar. Part 5: Commodifying Seasons Looking at commodities as futures contracts, because they deserve special attention. Especially useful in recent months. A lot of bag holders suffered big time in the oil contract bogmarket. The Bogdanoff's made a call, and prices on a few different oil contracts fell below zero. The behavior is so significant it is having effects on USD and global economic sentiment. Thank god we smart kids trade forex right? No zeros in forex, just infinities. There are plenty of articles online explaining how that happened, but let me tie in FNDs and explain the intersect with currency. The First Notice Day on futures products usually represents the peak of a trend if a trend was recently present. For example, the trend would occur over the prior 2 weeks or more to the FND date. You would want to look for positive open interest changes to support that trend. The FND could represent a definitive exhaustion point and signal a reversal or retracement. For risk management, these can be useful to look at if you trade a safe haven currency against a commodity or emerging currency. That means JPY & CHF (and now USD & EUR) against AUD, CAD, and sometimes NZD. Overall, most non-safe havens will have commodity performance attached to their currency performance. A quantitative or qualitative (ya eyeball it) composite of the performance of these commodities can help identify your center of price gravity (and its shift, is it being pulled up or down). I will come back to commodity futures and how they affect commodity currencies in the next part, so don't panic. In sum, I suggest googling the first notice days for commodity contracts (and you should also make note of currency contracts as well), taking a look at their chart development, and being mindful of a likely reversal occurring on those dates. This is an excellent way of finding extremes on the related pairs and can serve as 'risk mindful' price levels for entering into a long term trade. For example, not to get too far ahead of my risk management articles here, but let me briefly spoil with a more intermediate level trade: Relevant commodity futures contracts are rising in confluence with seasonal data and your currency (AUD/JPY) is rising in tandem. Your center of price gravity is accurately reflected as the current price of AUD/JPY at market, and you bought at the start of the month based on prior research, so you are in profit. Shortly before FND, interest rates on AUD are cut and the AUD/JPY trend flatlines. However, at the FND, the contracts make an extreme bullish move, and price action on AUD/JPY jumps as well (but in a smaller %). You have found an extreme, and can now close your long position or open a reversal position and wait for PA to retrace. Now, I could write a Chinese novel on all the specific things that should also happen with that trade, but that example is a framework you should familiarize yourself with. Part 6: That Time of the Month Your eyes are probably glazing over at this point. That's alright, everyone has a limit to what they can read and learn. Just like everyone has a limit to their net worth. Wonder if there is a relationship between the two. Let me make this a little easier by explaining just how complicated seasonality can be. As mentioned earlier, seasonality tends to work simply because there is an underlying calendar structure within highly regulated wealthy markets. These structures are created by the rules and standard practices of individuals and institutions, and more. These are effectively factors (factor investing) that shape price mechanics. Money moves in and out based on these regulations or standards (controlled timing), IE: tax obligations (end of year), holiday spending (consumer nations benefit), commodity contracts (exchange rules), and vacation months (volatility dynamics), and more. Global weather patterns influence shipping and availability of ports, temperatures and Ninos influence the price of agribusiness commodities normally tied to season... But it doesn't have to be that complicated for you, my small headed friend. I wanted to highlight the harder route first if you so choose to follow it, but the easy route is also available. Most of the forex market is USD, the remaining minority is EUR and JPY, and the rest is just a twinkle in some greedy fatcats eye. Why not just look at the seasonal or monthly performance of those currencies? Review the conditions from the peak, instead of the ground floor? Part 7: Started at the Top Firstly, if you prefer averages, you can average past 3 years, past 5 years, past 25 years, etc. You can find these indicators on TV by searching 'seasonality.' You can find them as free or paid indicators on the mt4 marketplace. You can also find them in various forms on other sites, some of them premium. Now, it gets even easier. Some pairs tend to close higher on some months versus others, this can be a useful unit of analysis when you attempt to fit seasonality into any overall model. If a pair like the USDJPY has 65% of closing higher in October but a sub 35% of closing higher in August, then you can evaluate risk by aligning yourself with history. You will know based on the MoM shift of probabilities. If you don't know this, then you need to return to the zoo, they are probably looking for you. Likewise, anything between 45-55% is likely noise, and not subject to the psychological intersect present in seasonality that I find significant. Again, we're still operating under a long-term trade frame of reference; intra-day traders will have their own sections in the future. To stay on target, long term traders with limited time to do additional research will want to focus on monthly seasonality performance at minimum. You don't necessarily need to be going through futures contracts, seasonal consumer spending, tax season dynamics, or weather patterns for perfect market timing opportunities; but know that the institutions do, and they have the money, they make the markets, and they intimately follow (or create) business and client trends. As I explained in part 1, what they think is the only thing that matters, even if it seems overly complicated or stupidly simple. Spending a little less time with your gann wave analysis and more time mimicking their research efforts will improve your survivability and your probability of accurately finding that center of price gravity. What about carry conditions? So let's return to the carry condition question. How can you use seasonality to find the center of price gravity, the resilient value, for long term positions? Alone, it is not sufficient, but it necessary to consider, especially in months where seasonality dictates a 65% or higher chance of a positive or negative month. For instance, you decide to plan a 3-month trade on the USDJPY, from August through October. You will know based on seasonal monthly performance, that the center of price gravity is moving from a lower to a higher price point. UJ has a 32% of closing HIGHER than it opened in August, a coinflip 53% in September, and 68% of closing higher than it opened in October. This instructs your risk management approach. You take additional risk holding a 3 month short in that period. And adding carry conditions, you pay a daily fee to make that trade as well. Personally, I feel sick just thinking about that trade. I had coronavirus last month, but that trade is worse. Now, that doesn't give you much guidance on when to open your position, which further sections will help elucidate. If you got this far, congratulations. Your mom and I are very impressed. More on fundamentals, commodities, and global macro in general next time. If you're someone that obsesses over the medieval metals or boomer rocks, then you will really enjoy the next section. Still lost and confused? Don't worry, it's already priced in.
Education
by CountofCoins
1
The Secrets to Forex & Protecting Your CarryYou must read the prior articles first. If this was a video game you would probably be trying to skip the conversation boxes at this point. Don't try to speedrun this, you'll die at the boss. --------------------------------------- I'm sure you're tired of all the poetry and want to get straight to the money. Money, after all, is the best form of entertainment. Now, last time we left off with timeframes and carry conditions, key components of the overall risk management message I want to get across. I figured that most retail traders operate on multiday/multiweek positions. Most know next to nothing about carry risk or other unique risks present only for non-intraday traders. If you intend to hold positions across several weeks/months (see pt. 3 for the definition), then this section is the most important of all the articles to come. In addition, I recommend doing additional research, especially if you have a job, are in schooling, or other responsibilities; because understanding this risk (and potential reward) can be very beneficial for those with limited time to spend. Part 1: Country-level Assets All wealthy people own assets. Assets can appreciate. If you 'own' a lot, you are, by default, wealthy. At least, for a brief moment in time. When you trade in forex, you are investing in a type of asset underwritten by a 'country' and paired with a similar underlying. The country creates the supply, and sets minimum standards in demand via tax law. Like businesses with stocks, countries with currencies and bonds can default, and flatline, leading to a breadline utopia. Inversely, they can also grow, and produce something of market value; and then provide returns to everyone that bet something on them. Some countries are flailing about, some countries are stable, and some are growing with seemingly no obstacles in sight. Which one would you want to invest in? Remember the dividend question? Before some median-salary economist gets in a huff, yes it's not always as simple as 'growing country = growing interest rates.' But here's what's important for retail traders: Central banks manage these 'country-level' assets with an evolving toolbox to variable acclaim. I recommend doing your own research into that topic, because it's too far outside the scope of these articles, and there are no unified verdicts on the 'science' behind any of it. The important thing to understand is that when you invest in these country-level assets, some countries demand a fee rate, and some offer a dividend rate. THAT'S IT. Room temperature or higher IQs will get this. Part 2: Free to Play vs Fees to Play You can find these rates by googling: 'central bank interest rates.' Those negative rates are FEES TO PLAY. Zero or higher is FREE TO PLAY. If you hold currency at a broker, these rates are realized and charged or credited to your market position at the daily rollover event. This occurs at the end of the 24hr cycle set to City time. So if you hold positions over 24hr cycles, you will be charged or credited REAL MONEY (no delivery gimmicks). Now, you can't trade currency in isolation in forex, it's always in the form of a pair. In case you haven't figured this out yet, the forex trader is the type of player these articles are designed for. This means, in lazy phrasing, that you are betting on the demand for the money (investor appeal) of one country AGAINST another. If you want to invest in a country as is, you can opt for national or municipal bonds, but note they do have slightly different carry conditions. But to stay on target, what do you think happens when you match a higher rate with a lower rate? The USD is a higher rate than the JPY. The USD is free to play, the JPY charges a fee to play. When you open a position in the market, you are FUNDING one of those currencies (basically against the other). This means you are liable to the interest rate gap. Brokers have an unnecessarily complicated explanation for why they HAVE to pay you money (or take your money) even though price action may not technically move from 23:59 to 00:01. They want to balance the books in a way they are comfortable with, because they have lots of liabilities with major liquidity providers. The net takeaway is that most brokers will generally charge or credit based on the interest rate gap between the currencies in your selected pair. So carry conditions are relevant accross most brokers unless you have a based Islamic account. Note that most brokers have a separate fee (usually .25%), which means if the interest rates are equal then you still get charged at rollover. There are other subtractions brokers will make as well (never in your favor), sometimes cutting deep in the rate gap. Unsurprisingly, they want to pay you as little as possible; in some cases, you can be charged on rollover regardless of gap or position direction. This is why you need to check the 'specification' of the pair in your MT4 to see the swap (or use a calculator provided by your broker.) Some brokers have special rules for emerging currencies with high rates like 8%, other brokers may offer advantages for trading these depending on their business structure. Wed to Thurs rollover is a x3 event , basically to make up for the lack of a rollover event on Sat and Sun night. You're probably wondering why these 'small percents' matter. After all, you're in forex to make highly leveraged internet magic money, not some quarterly dividend payment like your boomer parents. Part 3: Make America Think Again But it's just pennies a day right, who cares? Carry conditions can cost or credit you pennies a day or thousands of dollars a day, depending on the size of your position or the pair in play. On some pairs, you can make 15~ USD a day with just 1 lot in the market. That's over 5k a year USD. That's the equivalent of 540 pips a year, WITH 1 LOT ON 1 PAIR. And all you have to do, is fund a high rate currency bet against a low rate currency on a popular broker. That's it. No technical moonworshipping required. No stalking some coin startups social media for pump and dump schemes. No staying up all night worrying about the West going to war with Iran because you longed the Euro before dinner. It's the opposite of the coin flip, its coin printing. Many retail traders are from developing and emerging countries, it can be an excellent opportunity for men and women of all ages. Its like working at Wall Street and sending the remittances back, all from the ease of your home; without any political, religious, cultural, or economic barriers to get in your way. Sure it's not really that convenient. But the analogy would've been really cool if it worked. So what can happen, for example. At .40 lots for a full position, you would net 1.80 USD a day. Assuming 2 weeks to fill a position at optimal entry points (we'll talk about this later), and a remaining 2.5 month duration (5 fortnites), you net about 130 from carry credit payments during that trade period (1/4 a year), and be able to close with a very profitable or at least at a net-positive price level. Keep in mind, the average yearly takehome is anywhere from 2k-10k in developing countries. 1.8 a day can represent significant supplimentary income, and you only need 100-250 (in USD equivalent value) to support margin at most brokers. You could reinvest those winnings over the course of the first year and start the next year earning 7-8 USD a day. Now some of you might have more cash to waste. With a career in a developed country, maybe you have 25-50k to responsibly throw around in your 20s, no family, STEM job, good rent contract, little student debt, etc. We can upgrade that position size to 4 to 8 lots. 18-37 USD per day. You'll be doubling (before tax) your initial capital every 4 years. Part 4: Fields of Pink But wait, what if you have the opposite position? You fund a low rate currency against a high rate currency, or your trash broker demands fees on both. Your inverted head and shoulders 4h pattern looks (and smells) great, and you're ready to long the EURUSD. You plan to hold this one for a month at least, until it hits some absolute number like 1.200 (because it's the fifth wave in some model a statistician invented 40 years ago), and therefore, must happen. You decided your 'RR' would be 3 to 1, a 150 pip stop loss and a 450 take profit. You're already taking a tendie loan out at KFC in anticipation of a big win down the line. Meanwhile, you're losing 13 dollars a day (or let's say 0.5-2 pips worth of loss), guaranteed. Because you're paying a fee to play, while taking a bet that fails at a near 50% rate (much higher for retail), while throwing away weeks/months of time in anticipation of a result/delivery (capital opportunity cost). Now, if you had ten thousand years of nutritionally deficient ancestors, I can't blame you for this decision-making. But most of us haven't. So here it is, another forex secret: Quite simply, there are pairs the vast majority of you shouldn't be trading, and that includes majors with poor carry conditions (losers both ways with rollover). Pairs like CHFJPY, or any pair that has you longing the JPY or CHF (and usually EUR). Betting against the USD is another insured risk, when looking at majors. It doesn't mean you should never fund a low rate against a high rate, but you need to think in terms of FEES. Is it worth paying a daily fee to make this trade? Now, for the greedy. You'll need to do your own research, to decide if hunting extremely high rates on emerging/exotic currencies is the best course for you and your margin, of if settling with minimal (but not negative) rates on crosses or other majors is good enough for your strategy. My guidance is to look into emerging currencies if you don't have much time to trade daily (someone with a full-time job or family) or you don't intend to sink 1,000s of hours into mastering the intra-day trade (nightmare mode). Part 5: Washington Consensus Trading with carry conditions in mind can even be advantageous compared to other asset classes (like stocks or corporate bonds). It's like trading a high yield junk bond, only you have far less risk from defaults. What's a safer institution? Some 5 month-old, toothbrush-sharing, 10 slide company with 8 employees, or the full might of a nationstate? Sure, a few nationstates have defaulted in modern history. The upside is you usually have lots of heads-up, because default tends to be political in nature. That is, if you're a nation in need of cash, you can always get a loan. It's simply a matter of if the terms are politically acceptable for your faction. This all factors into the 'heads-up' period, alerting you to pull out or reverse your position. The US tends to sanction them beforehand (conveniently) kicking you out of those markets ahead of total economic disaster. The complete opposite occurs with some shady junk bond at 15%, where the company disappears overnight. Companies fail for the smallest things, they fail all the time, and the world goes on. A country failing is always geopolitical in nature and market rules about fair play are thrown out the window. This is an intrinsic advantage to forex and global macro tradables in general. I'll talk more about the future risk of national defaults and the utility and primacy of forex as an asset class in the final article. So beyond the obvious consideration, which is to fund a high rate currency against a low rate; what pairs should you trade and how else could you mind carry conditions while holding a long term position? Should you stick to emerging (exotic) currencies against safe-haven currencies? IE, you only short the EURMXN or fund against the CHF? And what indicators/models (from article pt.2) should you use to achieve the safest average price entry? Part 6: Not All Edges are Sharpe Forex is highly volatile, so you may have an advantage in the carry conditions, but suffer a net loss from a poor initial position when you decide to close. A currency with a negative rate could move against you, bigly. Remember, the future holds unlimited risk. But the distinction here (as mentioned in the prior article), is the resilient value in understanding that contracts can have insured risk outcomes. Cost/benefits that are legally settled (from the past) at the point of opening position and at the rollover event, even if brokers tinker with the point payouts, the 'deal' is still there in some form. Here's a poorly kept institutional secret, greed often drives the price in the direction of the higher interest rate currency in a pair over multi-month periods, so this doesn't really matter. Wealthy investors are greedy for higher payouts from emerging countries: where labor is cheaper, new factories spring up all the time, and real estate can be opportune. Part 7: Bat Soup vs the Fortune 500 Old school risk theory in markets argues that high volatility = high risk, but in recent years it has evolved beyond such mathematical explanations, especially as consecutive market challenges broke paradigms. Boomers are slow learners, but they adapt quickly when they start losing money. The subprime crisis cost them big time. And it's true today for our sniffle pandemic. It's simple: On high timeframes across longer-term positions, macroeconomics and geopolitics reign supreme. This isn't just a forex rule. This has been true since the dawn of markets in human society, it is true today, and it will be true in the end. Regulation and interest rates are variables that follow those leaders (not precede). That is, their behavior is shaped by the first two; macro and geopolitics. Think about COVID-19. Look what a few bats and one strange wet market did this world. Macroeconomics and geopolitics produce basic patterns in the human brain that propagate through our societies as two different frequencies: the short wavelength called fear or the long wavelength called security (interpreted in complex ways by players in markets). These are filtered by timezones, languages, civilizational and organizational biases, technology, individual upbringings, and the incumbency of delusion and greed. Nanoseconds, or years later, this all gets represented as a market outcome on a chart. Amazing that people spend so much time analyzing the chaotic patterns of some shit on a floor instead of what was on the menu last night, when they try to understand what went wrong. So if you can understand markets during these strong periods of psychological stress, and during soft periods of algorithm auctioning and market making (call it ranging), then you can sail all the seas and survive all the storms. This is where concepts like seasonality, ATR, regressions, psychological origination, hedging, news trading, major moving averages, and others come into play. In the coming weeks, I'll start to break down the major components of those, and where the center of price gravity and extremes are for these higher timeframe, longer-term positions. So you can find the optimal entry opportunities for longer-term trades, while also taking advantage or hedging against carry conditions. It's time to start charting the course.
Education
by CountofCoins
GBPJPY Long Term Carry Trade *BACK BORIS*I am now entered into a long term buy & hold position on GBPJPY. Price has broken out through multiple resistance levels last week on the back of the new conservative majority. Thursday/Friday saw the fast money come in to the markets with heavy short term buying. Price is now consolidating probably caused by profit taking on the speculation trades and the bigger buyers waiting to buy in to the continuation. I am long GBPJPY from 146.00 with a large stop loss and multiple targets. You can see the consolidation on the 4hr timeframe chart with price being held up by the daily pivot level, fib 0.382 and lower timeframe 50EMA. I believe we could see GBPJPY at 155.00 by June 2020. Why GJ? GBPJPY benefits from positive swap fees with GBP having an above zero interest rate and the Yen having negative interest. There for it pays to hold this trade with daily swaps being paid by my broker to me.
Long
by UnknownUnicorn772665
1
USDMXN - The Carry Trade for 2019Each trade I am allowing an 8,500-pip drawdown. I will be looking to scale in and also add in multiple positions when the opportunity arises. The first two levels I'm looking to get involved is 19.0300 sell limit and 18.9500 sell stop order. My final target is 17.4580. This is a carry trade. The estimated calculation for this pair is 1 lot 1 pip $0.55. *Disclaimer - This analysis alone DOES NOT warrant a buy or sell trade immediately. Before you enter any trade in the financial market, it is very important that you have a proper trading plan and risk management approach. The sharing of this idea is neither necessarily indicative of nor a guarantee of future performance or success.
Short
by KarYong
2
EURHUF - strong Hun eco data + carry effectFundamentals - Hun core inflation above MNB target -> rate increase probably in March - wage growth steadily above 10% - GDP growth above expectation, 5% yoy The eco picture resembles scenario the Czech case from 2017 where the central bank started raising rates (wage pressure, inflation, housing prices) and the korona strengthened 6-7%. Technical - EURHUF short trend - 318 resistance tested, move above rejected -> next support weekly 200 DMA @ 313 Trade plan - EURHUF short opened, carry in favor - Be patient, next rate decision 26th Feb
Short
by RobertSoos