EURUSD ideas

The EUR has dropped 3% vs the USD since the FOMC announcement and there is very little fundamentally for this direction to change, however, this being said there does appear to be some areas that pose good areas for support.

Below shows an hourly EURUSD chart overlayed with triple SMA (50,100,200) and then 1Yr EUR swaps overlayed. On top of this there are a variety of Fibonacci levels and Stochastics and RSI.

EUR vs Swaps

As we can see during the last trading week the swaps and the EUR have diverged to create a short term undervaluation for the EUR (Swap implied fair value - 1.33) Also at 1.3001 and 1.2973 there are longer term fib levels which on top of the Psychological level should act as support.

Stochastics and RSI are both oversold and due a pull-back, and when considering the double bottom price action we could see a bounce back towards the swap value.

While there are significant headwinds over the coming week such as various unemployment data (NFP, ADP, claims etc.), PMI's and ECB press conferences.

Furthermore, as seen here the German-US 2 year spread has been tracking very nicely but during Friday's session there was a small divergence.

For this reason I got long EURUSD at 1.3000, with a protective stop under 1.2950 and a target at around 1.3150-1.32

High yield / emerging trade update

A few days ago, I put out a trade idea:

http://macrocredit.blogspot.co.uk/2013/06/any-opportunities-in-emerging-high.html

In short here are the positions I entered -

24/06/13 - Long ZN_F at 125*26, target of 127*00 and stop on close below 125*00

24/06/13 - Long $HYG and $EMB respectively at 89.70 and 103.72. targets 91.50 and 108.00 with stop below the lows.

As an update for this, the overall idea for to trade a bounce and it's been a bit of a mix with both HYG and EMB doing very well and the ZN futures doing well before retracing to near unchanged.

This shows the EMB trade which netted a nice 3.7% profit,

HYG was less impressive with only 1.25% after closing at $90.82

Finally the worst performer was the US 10's trade which I've closed early as with the other. Only a profit of 0.5% or 6bps but still ok.

Either way some nice scalps in the credit markets...

Any opportunities in the Emerging / high yield credit markets?

Unless you've missed it, the High yield / Investment grade / emerging / and even safe haven credit markets have sold off considerably with the yields rising across the board. However even though there is strong and expected talk on tapering the QE program there are still some opportunities. For example, the Fed IS STILL BUYING $85 billion of financial assets per month and there is still demand in this market.

Combine this with some short term technicals and we have some trade ideas.

to start with, the US 10's are going to be running the show as they are the most commonly viewed duration on the curve. So lets look here

Here we can see a longer term picture and see the huge short term weakness in bonds, but Stochastics are overbought and the yields are running into some stern resistance.

Here is an hourly view..... We can see that currently at 2.56% we are riding the upper level of the channel, but once again stochastics are overbought (in terms of yield) and so due a pullback, if we retake 2.5% then we could accelerate to 2.4% (bull/bear pivot) furthermore the Fibonacci levels seen in the first image have a 50% level at 2.58% and a close below that will show failure to break higher.

We can see the potential for a bearish candlestick formation, potential pinbar / evening star forming

Enough looking at the US 10's, we can see that it is likely we fall to 2.4% again, so I am looking at High yield and emerging bonds as high beta could react better. So I'm buying ZN_F at 125*26 for a move to 127*00 with stops at close below 125*00. you can see with inverted ZN the levels I'm referring too.

Now looking at $HYG (ETF for HY credit) we can see the potential of a bounce, because of this I'm Buying at $89.70 (20:44PM UK) and looking for a move to 91.50, a stop on close below previous low.

Furthermore I'm buying $EMB at 103.72 (20:46PM) for a move to 108 with stops below the lows also. Similar looking chart - just getting long risky credit!

Trade idea on the fact the Fixed income isn't a one way train downwards and trying to catch a falling knife. Tight stops, good R:R

If you're inclined to look into FX, you would Short USDJPY Short USDTRY and USDZAR, but I don't want to much exposure this direction.

Time to short the Canadian Dollar?

Over the last few trading sessions, and primarily through the recent FOMC annoucnement many all currencies have been weak against the USD, including the CAD. now considering the recent shift in the Governor of the BoC, is it now time to short the CAD

As can be seen through this chart, the USDCAD has broken up above some very key levels dating back to 2010, while in the short term there may be some covering headwinds there is a very strong potential that we head up to 1.0650 and then even further through to 1.0850

USDCAD. Thomson Reuters

From here we need to consider the best candiate to sell the CAD against, the USD looks interesting but there maybe a better candidate, this is because even though I'm bullish long term the USD, the short term yield differential between US 2's and CA 2's is not supportive of this recent move

USDCAD vs US2CA2 yield spread (LHS). Thomson Reuters

Because of this, maybe there is a short term play for the AUDCAD, As we can see below there has been a divergence between short term yields and this relates directly into swaps and is inherently bullish

AUDCAD vs AU2CA2 yield spread (LHS). Thomson Reuters

After suffering a nearly 11.5% fall in the last 50 sessions the AUD is overdue a corrective bounce and maybe now is the time. I would recommend buying at mkt 0.9625, with a protective stop on a close below 0.95 and look for a swing higher towards the previous swing lows and fib resistance at 0.9925.

Furthermore Price action is experiencing bullish divergences against both RSI (14) and Slow Stochastics.

AUDCAD. Thomson Reuters

In terms of fundamentals it should be very light, china may pose some issues as they could be on the verge of inducing liquidity measures to calm the banking system, this would be AUD positive but I wouldn't rely on it. From there we have CAD GDP on friday but that's a long way of now.

EDIT first ask of the week came in at 0.9600 so I entered there.

As I type Market in AUDCAD is 0.9735, and due to USDCAD bearish daily close I've decided to cover this trade for +135 (+0.5 in swaps)

Chinese credit problems?

It's no surprise that China has a lot of hurdles to overcome in the coming 6-12 months in terms of a potential credit crisis, the early tremors can be felt by looking at the overnight SHIBOR rate which recently spiked to 13.44% from a YTD average around 3%.

From the telegraph - here

Half the Loans must be rolled over every 3 month, and another 25% in less than 6 months. This echoes Northern Rock and Lehman bro's.

The chinese financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies to fork out $1 trillion in interest payment alone this year.

These comments reflect the current and fast growing instability in the Chinese credit markets and there are even more disturbing correlation to draw with the US of 2006/07

This the flattening Chinese yield curve represented through the 2s10s, once shifted a very similar pattern in the Chinese 2s10s emerges that is analogous to the US 2s10s pre-2008.

On the bottom pane is the spread between the SHIBOR overnight rate and the Chinese 2 year yield, normally negative (representing higher yield on bond vs SHIBOR) but in the past few weeks there has been a substantial spike higher.

This could just be a happy coincidence but to quote Fitch

Chinas credit bubble unprecedented in modern world history

This could be more of a problem then some may have previously thought......

Greek bonds

Greek bonds and stocks have been hammered the last few trading sessions and are now considerably off the highs in mid May. The Benchmark 10 year is trading over 300 bps higher with price falling over 20%!

On top of this the ATG (Greek stocks) have fallen over 28% from their highs representing another bear market in Greek stocks. Today's session saw a further 6% capitulation as bond yields rose 70bps

Overall with the recent politcal strain in Greece with their coaltion in tatters we could see further downside in both bonds and stocks and then we could see a potential rise in the Greek-German spread back towards 1,000 bps.

Post FOMC market reaction

On wednesday the 19th, we saw what was the first indications of a date to which the QE program was expected to come to an end, this of course had a huge market reaction.

Bond prices have dropped around 3% since the indication of tapering from the QE program by the Federal reserve, they indicated that 7% unemployment may be a good start and at this level they’d consider sowing down the program

***REUTERS POLL-MEDIAN OF 55 ECONOMISTS SHOWS FED WILL FIRST TAPER ITS MONTHLY ASSET PURCHASES BY $20 BLN

***REUTERS POLL-28 OF 60 ECONOMISTS EXPECT U.S. FEDERAL RESERVE TO START TAPERING BOND PURCHASES BY SEPTEMBER

These polls conducted by Reuters show a decent indication that the ending of QE may be closer than the market anticipated.

Not only did we see a sizeable reaction in the credit markets but the commodites were hit hard with Spot Gold trading as low as $1273 (-7%), Silver under $20/oz (-10%) and Oil dropping from $99 to $93.50