Forex Carry Trades Unperturbed By Financial Market Chaos

Well, what can you say? Yesterday was a “sell everything” day…..at least until that list included oil….after which it became a “buy everything” day. That is, until there were 45 minutes left in yesterday’s US equity session, at which point it became a “sell everything” day again. Fun for the whole family!As observed a few times over the last week or so, Macro Mas has found trading conditions evolve from pretty relaxing to downright terrifying at times. He’s found it pretty easy to second guess every trading decision he makes, often after only a few minutes. That’s an urge that he is trying to fight; in all conditions, but particularly when it gets a touch difficult, it’s important to look forward rather than back.

In any event, it doesn’t take much digging to confirm that conditions have been tricky, and that Macro Man hasn’t dropped 50 points of trading IQ since the 4th of July. Consider that over the past 10 trading days, a period in which the SPX has dropped 5.1%, no less than seven of those days have witnessed an intraday rally of at least 1.5%. Unless one is a brilliant intraday trader- and Macro Man is not- this sort of market naturally lends itself to trades that have a, ahem, “suboptimal P/L impact.”

Elsewhere, yesterday’s post was a perfect example of the market Heisenberg Uncertainty Principle in action. In observing the strange lack of volatility in GBP/JPY, Macro Man evidently changed the dynamic, as the cross finally broke away from the 211 tractor beam to close New York at 210. At the time of writing, it’s now in the mid 208’s.

The ability of the yen crosses to withstand equity market volatility has certainly been puzzling, but it’s not completely without precedent. After all, it was last June and July that the collapse of the Bear Stearns (remember them?) hedge funds sent the initial shockwaves of the current crisis through financial markets. For most of those months, FX carry was unperturbed: NZD/JPY rallied 8.8% from the end of May to July 23!

After that, of course, the wheels came off rather badly, as the chart above demonstrates. Now, Macro Man would not suggest that we’ll see a sell-off in yen crosses of a magnitude similar to last year, for the simple reason that aggregate positioning (at least among gai-jin) is much smaller. Curiously, next week’s RBNZ announcement is slated for the 23rd/24th of next week (depending on your time zone)….what odds that history repeats, or at least rhymes?

Finally, Macro Man supposes that he should write a few words about the regulatory regime in the US, where the SEC has temporarily banned naked short selling in certain institutions. While there may be some merit in banning naked shorts, the move does smack of desperation- particularly when one considers that a number of firms on the protected list are probably themselves perpetrators of the strategy in one way or another. What’s next? Banning puts? Banning sales altogether (”So sorry…this stock has a 100 year lock up period”)?

It’s enough to make one shake one’s head in despair. Macro Man had to laugh at yesterday’s Bernanke testimony, where Sen. Jim Bunning delivered a philippic of such vitriol that you’ve gotta say that he’s still got the fastball that propelled him to baseball’s Hall of Fame! If you haven’t seen it, click on the link for the video- it really is quite amusing.

Posted in Categories: Contributor, External Research, Forex, Japan, New Zealand, Stocks, UK, USA.

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