I read this great blog called The Short Side of Long whose tag line is “When it’s obvious to the public, it’s obviously wrong.” I couldn’t agree more with this sentiment. I try to avoid trading with the herd on emotional days like last Friday’s unemployment number release, but sometimes if I have been too aggressive going into the number, I don’t have the emotional fortitude to stick it out. So, I end up puking into the hole, along with all the other mopes. Then I end up looking like this guy, who had been long Yen because he is sure “Abeconomics was going to fail”, but covered it on Friday because he couldn’t take the pain any longer.
Although I traded it like a complete amateur, I am not surprised that Friday’s move has being completely retraced.
The Market Gods do not make this game easy, and the more obvious the technical pattern, the more likely it is that it is a trap.
Going into Friday’s unemployment number the US dollar’s rally was extremely extended, and although the action on the day of the release was about as bullish as you could get, it quickly became a “it’s all baked in situation.”
It seems that yesterday’s action confused many market watchers. I saw a lot of bewildered comments in my twitter stream. It seemed like many markets were moving in the opposite direction of what the fundamentals dictated.
I understand all too well what happened. Friday was the capitulation day for the fools like me that were trying to catch the falling commodities or shorting the US dollar rally. It was the end of the week, with a fundamental economic number release that printed out in black and white the fact that the US economy was improving, which caused all the traders with offside positions to cover. By the time trading opened on Monday there was no one left to buy because everyone had covered. There was no fundamental reason for the US dollar sell off yesterday – it was simply a function of it having gone too far too fast on Friday. Large bull moves don’t correct until the market has shaken off the weak bears that are trying to top tick the market.
The real question is whether this was merely a technical correction that will resume its upward trend after some consolidation, or whether that was a blow off top. Right now I am leaning towards assuming that action was late weak US dollar longs getting shaken off, but the ferocity of the rejection to new highs is troubling.
I seem to be zigging when I should be zagging, and shorting the Yen is also making things worse than if I just bought US dollars against a basket. Over the past few days various Japanese officials have been firing some warning shots across the bow. They are concerned that recent moves in the forex exchange markets have been excessive. Abe’s team seem to be getting cold feet regarding the recent large move in the Yen. Even Abe himself is sounding like the he is uncomfortable with the recent weakness.
ABE: ENERGY PRICE RISES FROM WEAK YEN IMPACT CONSUMERS, SMES: BBG
ABE: WILL TAKE MEASURES ON WEAK YEN, WATCH EFFECTS: BBG
I think there is a chance that Abe has started a ball rolling that he will be unable to stop, so I still think we head much lower in the Yen. But I am going to shift some of my Yen short into EUR and CAD this morning.
We continue to get some terrible economic numbers out of Germany. From the FT:
Output plunged 4.0 per cent from July, data published on Tuesday show, far more than the average 1.5 per cent drop forecast by economists and the largest decrease since February 2009, when the global financial crisis first hit Europe’s factories.
Coming on top of poor August data for industrial orders earlier this week, the numbers indicate that Germany is starting to suffer from a global weakening in demand for its exports due to geopolitical upheavals and slower growth in China.
With the figures influenced by plants closing for later than usual summer holidays, economists hedged their bets about the outlook for the rest of the year.
But they are no longer ruling out Germany falling into recession – with a possible decline in gross domestic product coming in the third quarter on top of the 0.2 per cent drop recorded in the three months to June.
The Germans are the real impediment to Draghi expanding the balance sheet aggressively, so as their economy slips into recession, this increases the odds that Germany relents.
Don’t forget that since the start of Abeconomics, the Euro has appreciated almost 50% against the Yen.
No wonder the European economy is sucking wind. Imagine you are BMW trying to compete against Toyota. Yes, I know they both have plants all over the world, but the German and Japanese economies are both export powerhouses, so this massive currency move has got to have an effect.
I think the Euro is a better short in here. Their Central Bank is about to embark on expansion, while the Bank of Japan has already been doing it for two years and appears to be getting worried about the results.
I am also going to use the recent US dollar weakness to add to my long position. I wish I hadn’t been such a mope in terms of the timing my recent trades, but I think that the latest moves are just washing out the weak traders.