AUD long idea

As we stand now weekly stochastics signal the most oversold AUDUSD since 2004, well below the levels seen in 2008, RSI is at similar levels and recent CoT data has shown us that there are record shorts in the AUDUSD. For this reason getting long on a contrary play is my main trade for the summer months (and for the next two weeks while I'm on holiday).

However I'm not just going to be buying AUDUSD, but also AUDNZD as a lower risk trade due to the highly correlated tendencies of this ccy's

Here shows the weekly chart with very support candles and with Stochastics very smoothly signalling a move higher. Both previous oversold stochastics signals have yield great results, same with RSI.

Now a look at the candles, here is the inverted hammer in theory

Here is the weekly set-up

We can see clearly from this how similar the reversal pattern is to the current AUDUSD set-up.

As it stands, the AUDUSD has just popped over 0.91, but as I started typing we were 0.9090, and this is where I bought in. As can be seen from the chart there is a horizontal level at 0.9385, at this will be my target +/- 15 pips. 

It also coincides with key fib levels of the move down and seems like a sensible target representing good R:R and strong probabilities. The AUDNZD will follow the AUDUSD but with a small beta and so at 1.1650 I'm getting long for a move to 1.18.

These trades are risk positive and this is the major headline risk with this trade - a stock sell-off will definelty hurt this trade but China seemingly won't any more. After a miss in CNY GDP the AUD has still managed to rally and this for me shows a fundamental shift in AUD outlook. For these reasons stops discretionary but somewhere around previous swing low 0.8950 or so.

Markets post Bernanke

Well we've seen a rather interesting shift in stance from the Fed. In my opinion the key headline was;

BERNANKE SAYS INFLATION, JOBS SIGNAL MORE FED STIMULUS NEEDED

In essence this has put back the expectations for tapering by a few months, but that will come. The bond markets, stocks, metals and FX trading like penny stocks as Ben spoke during a Q&A session, with the EUR trading 1.3010 from 1.2880 pre-speech and 1.2840 pre-FOMC.

As an update to a previously mentioned long 10 year trade, I've closed out on this recent spike at 125*22,just over a point in price and a nice 12bps. (I do believe it will likely rise and 2.5% on 10's is going to happen, just covering to take this one directional risk off the table).

Furthermore as the Dollar has absolutely crashed, I've also covered the short DX sep futures trade for a very healthy profit, but I've also decided to flip this trade as I see this move washed a lot of Dollar bulls out and now we should stabilize around 1.30 in the EUR (key fib level). I think the bias is still to the downside for the EUR so the USD should be supported but we have to see. 

Overall some very nice trades and now we have to look ahead. Bearing in mind, nothing has changed, it's just the EUR is at a 250 pip discount to yesterday AM.

Rate resistance coming up and what it means for the Dollar?

With a rather bullish (195k) NFP print, taper sensitive assets got hammered. This led to a range of 24bps for  the 10 year benchmark. With this Gold got hammered as the dollar got strongly bid (smashing EUR support) and of course stock were going to rise no matter what - if <estimate then strong due to later taper expectations, if >estimate then economy is stronger and so real money investors buy in and push stocks higher.

But, we can now see there is some significant resistance ahead for rates and the USD. There are many technical reasons but ultimately the next move will be decided by a few sentences spoken by Bernanke on Wednesday.

Either way, here is a look at the US 10's and it shows some strong resistance at 2.75%/2.78%. For me this level is crucial as if we see a further sell off in UST's then 3% is most likely.

UST 10Y. Reuters

Slow stochastics have diverged hugely from recent price action and this is a hidden bearish indicator at these extremes. For this reason, I'm looking to buy into 10's Sep futures contract at 124*16. This represents a yield around 2.74%. However this will change depending on where we open this evening.

Furthemore looking at the US 2s10s, we can see it has come a long way in the past few weeks (unsurprisingly) but it looks like it can't really go too much higher in terms of a long timeframe trade.

US 2s10s

at 233bps, I will consider trading a flattener at 240bps for some consolidation but for the sake of my other trade I hope it doesn't get that high.

So what does this mean for the USD? Well, with the higher yields the USD is becoming more and more attractive and this has actually lead through into a higher USD as we appear to be coming out of the worst parts of the global recession. This is shown by the shift in correlation between USD +UST's from negative to positive as the US economy has strengthened when considering 100 periods.

So we can see that if yields turn around the USD will likely follow, on top of this, stochastics look prime for a crossover signalling a top in the market.

So on top of being long bonds, I will also short Dollar index futures on the open, somewhere around 84.75.

Overall I'm looking for a move back to 2.6% on the 10 year and 84 to 83.50 on DXY.

Shorting vol

Volatilty has, understandibly, risen a lot in the past 2 months. For this reason positioning short vol is a possible (albeit risky) trade to enter. EM FX vol and AUD 1 month IV is where I'm currently looking at, as well as possible the GBP (unlikely).

Below shows a composite of EM ccy's 1 month IV and also the AUD 1 month IV. Both have moved a lot and look like a reversal is possible.

EMFX vol and AUD 1mIV. Reuters

Positioning through either a condor or short straddle with work, but for ease I will examine the possibility of a short straddle.

I will look at FXA (AUDUSD ETF) as an example, but I'll execute through FX options

Writing an FXA 17th Aug call and put at $91

Here we can see some stats on the left pane, with the chart of FXA (upper and lower +expiration drawn on)

Most importantly you can see the payoff structure, and likely this will be held to expiration so you can see potential vs. price at that date.

So as long as FXA (AUDUSD) stays between 87.50 and 95 we will see a profit depending on how close to 91 it is. I see that IV is likely to drop over the summer and while this is a representative trade example for FXA, actual spot FX is largely similar as is EM FX.

Peripheral debt markets

I'm sure everyone has seen the recent political problems in Portugal, with various ministers threatening resignations and various conflicts regarding austerity. While this is interesting, the debt markets are showing the true picture.

Below shows the 10yr Portuguese bond with a histogram of the 2s10s below, there has been a sharp rise in the past few days, leading to a 150bps flattening of the 2s10s, as you can see, it is currently a long way of the 2011 inverted curve structure but still echoes those times with huge volatilty.

PT10's and 2s10s. Reuters

Next shows the past few trading sessions for the 10s

PT10 tick. Reuters

An impressive move from 6.5% to over 8% has been seen in merely 2 hours of trading, as can be seen volatilty was high for most of the session, ending 50bps off the highs!! On top of the this the Benchmark spread (vs. bunds) traded at >605 bps on the highs.

But what was seen on this 150bps move higher was a near 10% drop in prices as clearly some rather large funds/IB were clearing out Portuguese bonds from there books in almost a fire sale manner.

PT's CDS' are now at 395/415bps and representing a 30% chance of default over the 5 year timeframe. the Spread is merely at levels from March/April but over 100bps higher than mid-May.

PT 5Y CDS ask spread. Reuters

Unforuntaley (for Europe) there was a hint of contagion as other peripheral debt markets sold off hard through a wave of risk off during early European session.

ITDE spread. reuters

As we can see the spread is exhibiting a bull flag pattern which spells trouble as a potential move higher could be seen, targets above is of course the 300bps level, but on top of that the 30bps flagpole would suggest 315 is a viable move.

Overall Draghi should be key tomorrow, and some further headlines from Portugal are to be expected so heads up.

EURUSD and USDJPY trade update.

While writing the EUR is trading at 1.3005 vs. the USD, this is well of the day lows at 1.2920, but as the daily close wasn't below 1.2950 this trade is still open and looking decidedly bullish. With stochastics (slow) crossing over sub 10 and very bullish bounce from a key 1 year trendline, it seems maybe the USD strength could be ending. This is illustrated below

EURUSD daily. Reuters

Furthermore, a divergence still exists between the EUR and 1Y swaps, which widened 1.5pips today but still suggests the EUR should be around 1.32 +/- 25 pips.

On top of this there is the clear hourly bounce perfectly at the trendline suggesting we may bounce in the short term.

EURUSD vs. EUR1Y swaps. Reuters

So technically, the EUR looks very bullish - thankfully there may be some restbit when it comes to fundamentals also. With Draghi's press conference tomorrow we could see some volatility, not one major desk is calling for any change in monetary policy and this view is to be expected. However words can be just as powerful. Of course anything could happen but with such short term support the risk:reward is definitely skewed to longs.

The first test to the upside is 1.3050, which if cleared 1.31 will be tested and if ECB allow, 1.3150 will be seen pre-NFP. However to the downside we see 1.2950 being crucial for directional momentum with the key 1yr trendline still being in play at 1.2925.

Below there and a break of 1.29 sees the 1.28 to 1.27 being tested and most likely even worse for bulls.

Overall in terms of the EUR, I remain bullish in my long position opened at 1.30.

Now onto the USDJPY short from 99.75, the timing on the trade was poor with a 100 pip drawdown at one point but seeing as the USDJPY managed to retrace (on Portugal/Risk fears) then we traded down to 99.26 at the lows.

I covered short for +25 at 99.50 on the move back up as Portuguese spreads were turning around.

Overall, poor timing but correct direction allowed for only a small profit, but there was much more potential.

EDIT - Widened trade limits for NFP, will watch carefully, but as it stands holding -80

USDJPY short idea

Dollar/yen is now up 5% since the FOMC announcement on higher US yields and a stronger Nikkei. Currently trading 30 or so pips shy of the key 100 level, BUT there has been a notable divergence between the US10-JP10 yield spread. This is seen below.

UJ LHS vs US10JP10 spread RHS

with the 10yr spread at 158bps the UJ is priced at around 98, normally when these two diverge they tend to come together.

Therefore I'm shorting at market 99.75, TP down below 99 and a stop on close above 101

Another rational for this trade is the resistance of the 61.8% fib level as shown below, this comes in at 99.9 just below of the psych level that is 100.

Furthermore with Goldman Sachs NFP reading being dropped to 150k (median at 165k) I thought I'd list a few major institutions estimates and review them pre-NFP on any variations (if any)

BNP Paribas - 175k
Citi - 160k
Credit suisse - 150k
Deutsche bank - 145k
Goldman Sachs - 150k
Morgan Stanley - 165k
JP Morgan - 150k
Soc Gen - 175k
UBS - 155k

However with such a wide spread between these there is often a surprise between actual and estimated NFP as shown below

NFP surprise vs. Reuters poll