Macro risk analysis - Daily Form for April 29, 2011


Inter-market Technical Analysis using algorithmic pattern detection


FRIDAY APRIL 29, 2011       08:46:00 GMT




Yesterday’s North American session produced some strong whipsaw behavior in many commodities - including silver and crude - as well as some edginess in the usual array of favored risk on assets. The end of the session last night brought most of these back into relatively calm equilibrium but one way of interpreting the erratic behavior is that markets are becoming somewhat over-stretched in their willingness to seek out momentum amongst the high beta assets. There is also a risk that many players are so short the US dollar that any sign of life in the world’s reserve currency (at least for now!) sends shivers across the quant fund community.

The metaphor of a lop sided market being like an ocean liner where all the passengers are moving to one side of the ship, and that this can cause a danger of the vessel capsizing, strikes me as rather apt for the extremes in correlation and strong appetite for risk at present.

The DAX index closed yesterday’s session exactly at the 20 day Bollinger Band ( with a 2.5 standard deviation), and since the German market has made such a dramatic recovery since the sell-off occasioned by the Japanese tragedy in mid March, I would suggest that the risks of a correction are now increasing.



Bloomberg is reporting this morning the following in reference to the Chinese yuan, or more precisely the renminbi:

China’s yuan strengthened beyond 6.5 per dollar for the first time since 1993, supported by speculation the central bank will allow appreciation to help tame the fastest inflation in more than two years.

The yuan strengthened 0.17 percent to 6.4907 per dollar as of 2:50 p.m. in Shanghai, earlier touching a 17-year high of 6.4898, according to the China Foreign Exchange Trade System. It’s set for a 0.9 percent monthly advance, the best performance of 2011. In Hong Kong’s offshore market, the currency jumped 0.29 percent today to 6.4635, the biggest gain in Bloomberg data going back to Aug. 24.

The People’s Bank of China set the yuan’s reference rate at 6.4990 per dollar, the strongest level since July 2005. The currency is allowed to trade up to 0.5 percent on either side of the official rate.


CYB, an exchange traded fund, provides a convenient method for taking a position on the possibility of further strengthening of the yuan.



Just to clarify something which I said in yesterday’s column regarding AUD/USD.

While the Aussie currency is showing extraordinary momentum to the upside it has not been able to break above $1.10 so far and as the 240 minute chart reveals the $1.0950 which I cited as a stop loss level has not been violated. The target for an opportunistic short trade in today’s session should be more precisely $1.0775 and not the 1.07 figure mentioned here yesterday. I did amend the commentary for some other web outlets which carry the Daily Form commentary but wanted to set the record straight for today’s session. I would not carry the trade beyond tonight’s close.



The Hang Seng Index closed the week at the 23,700 level and as suggested on the chart there is relatively strong support provided by the 50 day EMA and lower Bollinger band just below this level at approximately 23,400.


Macro risk analysis - Daily Form for April 28, 2011


Inter-market Technical Analysis using algorithmic pattern detection


THURSDAY APRIL 28, 2011       10:55:00 GMT




In yesterday’s North American session the S&P 500 futures drifted downwards in early trading but bounced exactly at the 1340 level.

Following the break out earlier in the week the index has moved up more than 15 points - although it has been sliding during the overnight and European session and is currently at 1350.

I shall repeat my bullish stance towards this index with two previously mentioned qualifications:

1. A dynamic move below 1338 would push me on to the sidelines.
2. A topping out of the euro and Aussie dollar would also not only make me less confident on the long side but tempt me to get short the index.



The weekly chart for spot silver is developing the kind of parabolic price behavior which could, in my estimation, lead to a blood bath at some point in the not too distant future



I am watching AUD/USD rather closely in today’s session as there were some indications during yesterday’s trading that some large players may be liquidating long positions to book profits.

The 1.0775 level would be an intermediate term target but I would be prepared to exit quickly if the Aussie takes out the 1.0950 level.



In my column from April 21st I cited the bearish case for BAL, the ETF which tracks the price of cotton futures, and which can be found here .
I would suggest that now would be an opportunity to cover 2/3rd of the position if you decided to act upon this suggestion and I would leave the remaining 1/3rd for a potential test of the $80 level.


Macro risk analysis - Daily Form for April 27, 2011


Inter-market Technical Analysis using algorithmic pattern detection


WEDNESDAY APRIL 27, 2011       11:40:00 GMT




Equity traders who have aligned themselves with the implications of the old adage "Don’t fight the Fed" over the last several months have been on the right side of the market - and yesterday was yet further validation that the path of least resistance for US equities right now is decidedly upwards - at least while the dollar cannot find any support from global fund managers.

Yesterday I made the following comment about the formation on the S&P 500 futures which turned out to be a fairly accurate reading of what happened in yesterday’s session

The 240 minute chart suggests that a clean break above 1340 - which would validate an interpretation of the pattern as a cup with handle - could see the index move sharply upwards.


Having decisively moved above the previous recent high of 1338, and then 1340, the futures rallied up to 1346, and as the 240 minute chart reveals (captured during early morning European trading on Wednesday), a pennant formation is developing. While yesterday’s break through looks convincing it is now quite critical for the bulls, who are targeting much higher levels, that the 1338 previous resistance should now act as reliable support.



I have not commented much recently on the US Treasury complex as yields, especially at the long end of the curve, have been moving down despite the evidence that there are signs of a real pick up in economic activity in the US (just how much of this increased activity is due to the tsunami of easy money and daily POMO purchases is another matter), plus the continuing barrage of naysayers claiming that UST’s are in the midst of a major bubble.

PIMCO has stated recently that, in its opinion, the US economy has reached the Keynesian endpoint and that the Ponzi party is almost over, but this has not deterred many institutions from continuing to load up on UST’s. Part of the explanation goes back to the discussion from last week about the bi-polarity which is so evident in present day markets - with some quant fund players seeking out as much risk as they can find (comforted by the Fed’s declared aim of supporting asset prices as a top priority), while other just cannot stomach the occasional mishaps which cause those same risk assets to plunge on negative news developments.

The 10 year UST is now approaching its 200 day EMA at 3.25% and the risk/reward trade-off would suggest that the balance is now tipping in favor of shorting the 10 year note - and this can be done via a long position in the exchange traded fund, TBT.



GBP/USD behaved more erratically than usual during yesterday’s session with some abrupt whipsaw behavior. The probable cause that kept the traders in London and New York on edge was the release today by the UK’s Office for National Statistics of the preliminary reading for Q1, 2011 GDP for the UK.

The Q4, 2010 number showed a contraction of 0.5% which surprised many, and the number released earlier today showed that growth was pretty anemic at plus 0.5% - which means that the UK economy has essentially been flat during the last two quarters

As can be seen from the 240 minute chart sterling is well supported around $1.64 but still has not been able to penetrate $1.66, although at present there appears to be another attempt under way to take this barrier out. A clear break above $1.66 would raise the possibility of a 1.70 handle in the intermediate term as the monthly Ichimoku cloud base occurs at this level.



Although it was difficult in daily scanning today to find many charts where the price trajectory looked as though anything other than further price gains seemed likely, the chart for EEM caught my eye based on the clear negative divergence between the price action and the highlighted section on the MFI chart.

However, somewhat against my preference for looking for at least one or two charts each day which would support a short recommendation, for the time being I am respectful of the power of the Fed to get its own way with US equities - even though when translated back into a hard currency (such as the Swiss franc) those price gains are more or less illusory.


Macro risk analysis - Daily Form for April 26, 2011


Inter-market Technical Analysis using algorithmic pattern detection


TUESDAY APRIL 26, 2011       11:11:00 GMT




The S&P 500 futures are currently testing the intraday high of 1337.25 from April 21st, which was itself the highest level seen since June 2008.

The 240 minute chart below suggests that a clean break above 1340 - which would validate an interpretation of the pattern as a cup with handle - could see the index move sharply upwards. As the US dollar remains under pressure those asset allocators that use a different base currency need higher nominal US equity prices to preserve asset price parity with competing indices denominated in stronger currencies.



The fibonacci grid which has been overlaid on the daily chart for the Nikkei 225 shows that since the alarming events of March 19th the Japanese index has spent much of the recent past hovering between the 50% and 62% retracement levels of the high/low seen on the chart.

The index dropped back by 1.2% in Asian trading Tuesday and is now poised at exactly the 50% level. Further weakness would suggest that the 38% retracement level at 9240 would be a feasible target in coming sessions.



The weekly chart for the USD/CHF pair shows that the Swiss currency continues to benefit from its status as the safe have currency without equal as the flight out of the US dollar continues unabated.

In fact, within the last 24 hours the Swiss franc has achieved a new post World War II high against the US currency at 0.8744. Recently I mentioned in this commentary that I am holding, for the long term, a short EUR/CHF position and despite the recent strength in the EZ currency the position has already seen a sizable gain, and a re-visit to the 1.25 level on this pair would not be surprising.



The Shanghai Composite index lost almost one percent and has clearly revealed a difficulty in maintaining a foothold above the 3000 level. A minor uptrend line has been violated but the bigger picture suggests that this index will need a hefty momentum whack to re-challenge the critical 3200 level which I have discussed here before.






TRADE OPPORTUNITIES/SETUPS FOR TUESDAY APRIL 26, 2011


The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
None of these setups should be seen as specifically opportune for the current trading session.
For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm





EURUSD    

EUR/USD has penetrated the downward sloping trend-line through the highs, extending back to the historic double top at $1.60 achieved in 2008, on the weekly chart.

Despite ongoing difficulties with sovereign debt for many EZ states - there are virtually no private sector buyers for the debt of Portugal, Ireland and Greece - the euro continues to move higher with a $1.50 target now a distinct possibility. My hunch is that the PBOC is helping to propel the euro higher as it divests itself of some of its dollar denominated assets, and many funds that were big players on the short side have been taken by surprise at the robust upward trajectory of what is still, in my estimation at least, the creation of a flawed currency union.




XME  SPDR Metals and Mining ETF  

The daily chart for XME, which tracks the metals and mining sector, reveals that money flow is not supportive for this sector, and a feasible short term target would be the cloud formation at 69.70 - and considering that the cloud is very "thin" on the chart at this level, there may not that much support on offer.




KBE  SPDR KBW Banks  

KBE, which tracks the KBW Banking Index, is touching the 200 day EMA where some near term support should be found, but for the longer term the chart suggests that the $24 level would provide an even more attractive entry point on the long side.



Macro risk analysis - Daily Form for April 21, 2011


Inter-market Technical Analysis using algorithmic pattern detection


THURSDAY APRIL 21, 2011       10:28:00 GMT




Having spent the last two days in rural South Wales, where I was mentoring a client, I returned to witness some fairly extraordinary behaviour (in my estimation at least) in the markets yesterday. Nearly everything scanned on the daily charts this morning - FX pairs against the USD, ETF’s (except the inverse ones) and most commodities - seem to have enjoyed large opening gap ups and considerable gains.

My estimation of the directional bias in EUR/USD turned out to be completely wrong although events this morning with the out-performance of sterling against the euro did validate my suggested trading stance in Tuesday’s letter.

After trading many different markets and writing commentaries for several years I have learned that one should always accept what is clearly visible on the charts. And what is clearly visible is a bi-polar market, where we could move from Monday’s gloomy view of the EZ and its currency and a general risk aversion, to, within the space of 24 hours, an all out embracement of risk assets.

The chart for the VIX below shows that we gapped down in yesterday’s session and registered the lowest level on this indicator in well over a year. What is even more extraordinary is that just one month ago we saw levels above 30 - twice yesterday’s value.

Bi-polar markets are not easy to trade for the inexperienced, but once one develops the mental agility to completely change one’s assessment of the prevailing macro risk condition at the drop of a hat (quaint old English expression) then the ability to gain from strongly trending behavior - even if it is the complete converse of market conditions just 48 hours ago becomes relatively profitable. I would suggest that it is not likely to be too fruitful to try to figure out whether Monday’s fear or Wednesday’s exuberance is the more valid long term outlook....wait and see what the charts reveal in coming sessions.



The yen is gaining strength against the dollar - which is not to say too much as just about every currency in the world is doing the same - but the chart for EUR/JPY strikes me as one where the projected cloud formation suggests that there could be a correction back towards the 118 level over the next few sessions.



BAL, an exchange traded fund which tracks the performance of cotton futures contracts, seems to be technically vulnerable and a retreat to the level indicated by the arrow, or the 200 day EMA just below that, seems feasible in coming sessions.



The basing pattern on the daily chart for MUB suggests that this proxy for US municipal debt appears to be poised for a break above current levels.

The only cautionary qualification I would insert is that the MFI and RSI readings are at elevated levels already so if the break does not occur in today’s session I would be looking to exit the position at the end of the day.






TRADE OPPORTUNITIES/SETUPS FOR THURSDAY APRIL 21, 2011


The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
None of these setups should be seen as specifically opportune for the current trading session.
For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm



Macro risk analysis - Daily Form for April 19, 2011


Inter-market Technical Analysis using algorithmic pattern detection


TUESDAY APRIL 19, 2011       10:29:00 GMT




In European trading this morning the 240 minute chart for the S&P 500 futures shows that the index has barely budged from its close at the end of North American trading on Monday 18th.

The futures reached as low as 1290 during yesterday’s session but managed to find support which brought the index back to the 1300 level.

It is conceivable that the index could pull back towards the 1320 level but in so doing a bearish flag pattern would have evolved. A test of the mid 1280’s remains a distinct possibility over the next few sessions.



EUR/USD is now within a box outlined by previous support at $1.4280 at the top and the key test level at $1.4150 at the base as the support line shown in red on the 240 minute chart below.

The overall directional bias appears now to be downwards, but for the time being I would play this cautiously and tend to look at opportunities of cross rate trading against sterling, based on the current patterns for EUR/GBP which indicates that sterling is finding more of a bid in its rate against the euro.



The following chart from Bloomberg shows just one of the several risk aversion factors which caused some of the turmoil across global markets yesterday. The graphic shows that the effective yield on two year notes of the Greek government has exceeded 20%. Surprisingly the Greek government continues to deny any allegations that it will need to re-structure its sovereign debt.

The euro had already begun to react negatively to this news before the S&P announcement added further pressure across the FX markets, althoug whether or not there are long term consequences for the major currencies vis a vis the US dollar from the negative outlook issued by S&P, remains somewhat doubtful as the USD has already been unloved for several months.



I shall repeat my comments from yesterday on the CAC40 as the index closed exactly at the 200 day EMA as the comments below suggested

France’s benchmark index the CAC 40 is revealing relative weakness in European trading on Monday morning.

A principal reason cited for the weakness is the relatively large exposure of French banks to Greek sovereign debt, although the situation for German banks is as, if not more, troublesome.

Support on the CAC 40 should be found at the 200 day EMA and readers are reminded that the exchange traded fund, EWQ, provides an opportunity to take a position on the MSCI index for French equities.







TRADE OPPORTUNITIES/SETUPS FOR TUESDAY APRIL 19, 2011


The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
None of these setups should be seen as specifically opportune for the current trading session.
For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm





BVSP  Brazilian Bovespa Index

The Brazilian Index (BVSP) closed yesterday's negative session at exactly the 50% retracement level between the highs and lows illustrated on the chart, which could provide an opportunity for a bounce in today's session. The exchange traded fund, EWZ, provides a vehicle for taking a position on Brazilian equities.




SHY  iShares Lehman 1-3 Year Treasury Bond  

SHY, an exchange traded fund which captures the price performance of the 1-3 yr spectrum of UST's shows that. contrary to some expectations that the S&P announcement on the ratings outlook for the US could be disruptive to the Treasury market, there was in fact, as discussed in this column yesterday, a heightened desire by many fund managers to exit all kinds of risk assets and hide out in the short end of the yield curve.

Technically the pattern of lower highs suggests that there appears to be, despite the occasional and abrupt dashes into safe haven assets, an underlying downward bias to prices and accordingly an upward bias to yields in this key part of the Treasury yield curve.



Macro risk analysis - Daily Form for April 18, 2011


Inter-market Technical Analysis using algorithmic pattern detection


MONDAY APRIL 18, 2011       08:45:00 GMT




In European trading on Monday morning (18th), the 240 minute chart for the S&P 500 futures shows that the index remains under some pressure but has so far managed to rally each time it reaches down to the 1300 level.

Noticeable too though, as discussed on Friday, is the failure to break back into the cloud formation above, suggesting that the 1320 level is proving to be strong resistance.

Once again the evolving dome formation is quite a notable characteristic of the formation in this time granularity window, and I shall stand by my view that this index needs to test lower levels at 1295 and perhaps 1280/5 during the course of the next few sessions.



EUR/USD should find some support at the $1.4280 level but it is also evident from both the cloud formation and the dotted line leading up through the lows evidenced on the 240 minute chart that this level is quite critical for the EZ currency.

Elections in Finland over the weekend have muddied the waters as far as continued support from the Finnish government for the new financial stability mechanism currently under discussion in Brussels, and the ongoing flip flop on whether Greece will re-structure its debt is providing a "wall of worry" for those long the euro.

As mentioned last week, even if EUR/USD holds key support, there are better reasons to be looking at short EUR/CHF positions.



France’s benchmark index the CAC 40 is revealing relative weakness in European trading on Monday morning.

A principal reason cited for the weakness is the relatively large exposure of French banks to Greek sovereign debt, although the situation for German banks is as, if not more, troublesome.

Support on the CAC 40 should be found at the 200 day EMA and readers are reminded that the exchange traded fund, EWQ, provides an opportunity to take a position on the MSCI index for French equities.



Yields on the five year US Treasury note have seen a slow process of attrition over the last few weeks despite concerns about the potential expiration of QE2 (could there be a QE2 supplementary?) and also evidence - at least in most other economies of the world, except (apparently!) the US, of inflationary pressures from commodity and other input costs.

There is still ample evidence that a lot of fund managers are "hiding out" in short term US government securities with the rate on very short term paper at less than 10 bps.

Many strategists, including PIMCO, have been touting a short position in UST’s, but so far the tide has been against them. In my estimation the continuation of mega generosity by the Fed is still acting as a major support for US government debt, and the seeking of safety amidst an overall risk on environment for equities and commodities, helps to illustrate the current split personality of capital markets.


Macro risk analysis - Daily Form for April 15, 2011


Inter-market Technical Analysis using algorithmic pattern detection


FRIDAY APRIL 15, 2011       10:13:00 GMT




The 240 minute chart for the S&P 500 futures, which I find useful because it is not such a commonly used time window, illustrates clearly that the index has been grinding further below the cloud formation. The dome formation which I discussed here earlier in the week continues to unfold but the suspicion is that there are several constituencies that are keen to support the index from a decisive drop below 1300.

The base of the cloud at around 1320 will act as a firm resistance, and I would suspect that a test of the 1295 level (at least) lies ahead in the next few sessions.



The strength of sterling and the euro - although the latter is now beginning to show some signs of fatigue - have been somewhat surprising to me this week. In essence their strength underlines the fact that the US dollar just cannot get any respect at all to quote one of the best known lines of Rodney Dangerfield.

The precarious nature of the sovereign debt of Greece is weighing somewhat on the EZ currency, but in contrast to the outright flight from the euro almost one year ago when Greece had to be rescued, the fact that the dollar is not showing any safe haven behavior is noteworthy.

The one currency which will be the beneficiary of capital flight from the EZ will be the Swiss franc which is why from both a fundamental and technical point of view I am holding a short EUR/CHF position for the intermediate term.



GDX, is an exchange traded fund which tracks the gold mining sector, and, while the metal is moving steadily towards the $1500 level, the charts for individual miners such as Newmont Mining (NEM) are showing bullish patterns.

I would anticipate another attempt by GDX to break above the recent highs just above $64 in coming sessions.



KBE, which tracks the KBW Banking Index, looks vulnerable to further setbacks but would definitely be a candidate for the long side if it should reach down to the $24.50 level, as indicated by the arrow on the chart.


Macro risk analysis - Daily Form for April 12, 2011


Inter-market Technical Analysis using algorithmic pattern detection


TUESDAY APRIL 12, 2011       11:12:00 GMT




S&P 500 futures have been sliding since yesterday’s North American close and are now positioned at 1312 which is a level of some significance as it marks a drop below the cloud formation on the 240 minute chart as seen below. Also, as annotated on the chart, there is evidence of a rather foreboding dome formation in progress.

There are layers of price support in the 1300-1310 region but if these were to be taken out today then I would be targeting a potential retest of the 1280/5 zone.



Sterling is suffering from a double whammy in European trading. Retail sales for March came in at -3.5% on a like for like basis which is the worst level since the British Retail Consortium started collecting data more than 16 years ago. Also the March CPI number showed an easing of inflation which reduces the likelihood of an imminent BOE base rate hike.

The drop below 1.6280 opens up lower levels and the target over the next couple of sessions, I would suggest, is as indicated by the arrow on the chart at approximately 1.6130.



Germany’s DAX index is off about one percent at the time of writing and faces a test at the 7125 level which is at the intersection of both the 50 day EMA and the base of the cloud formation.

Volume analysis on the DAX is also revealing negative divergences where selling is accompanied by higher volume than seen during those sessions when the index moves up.




As discussed last Friday at the Traders Expo seminar in London, my preferred metric at present for gauging overall or macro risk appetite is AUD/CHF which in overnight trading reflecting, amongst other developments, new concerns about the Fukushima situation, dropped below a key trend line and the cloud formation on the 240 minute chart.

In my estimation, it would be prudent to be looking at overall risk off positioning if this pair breaks below 0.93.


Macro Daily Form April 11, 2011


Inter-market Technical Analysis using algorithmic pattern detection


MONDAY APRIL 11, 2011       12:17:00 GMT




During my absence last week - which was due to unexpected eye surgery - many of the themes discussed during the commentaries for the prior week have unfolded. In particular EUR/JPY performed very much in accordance with the discussion outlined here on March 31st and revisited again below; gold has moved ahead confidently after breaking above the $1445 resistance level and the development of most consequence is the ongoing rise in WTI (and Brent Crude) towards the $120 target level.

The Russell 2000 registered a new historic intraday high of 859 last Wednesday but closed out the week at the 840 level. As the weekly chart suggests there is a clear possibility that an interim double top pattern may be evolving and for the time being, having been notably bullish on the micro cap stocks for some time, the safest stance may be one of removing or minimizing exposure to this sector.



Here is my comment from the March 31st newsletter

The chart for WTI Crude futures (May contract) is displaying a pattern on the 240 minute chart which has the appearance of an evolving cup with handle formation.


Using a monthly chart the high values on this contract just shy of $150 per barrel seen in the summer of 2008 are clearly visible as is also is the plunge back towards $30 a barrel in early 2009.

Using a fibonacci grid it can be seen that the current price has surpassed the 62% retracement level and without any cloud formation to penetrate, a case could reasonably be made that this contract has the possibility to move a lot further. Also worthy of attention is the exchange traded fund, BNO, which tracks the price of Brent Crude - which has been in the vanguard of the move higher in crude - and which has been trading in the mid $120’s.



While I was away from my desk during most of last week I did leave my position in place for EUR/JPY and as it turned out price development followed very much the path indicated in my last commentary before my eye operation. Here again is what I said on March 31s.t


EUR/JPY is approaching the top of a well defined range or channel on its daily chart which has prevailed for more than a year

The critical level is 116 and a break above that level would open up a move to the 120 level which is indicated as the target level of the weekly Ichimoku chart pattern.

Of all the FX possibilities at present for position traders this one would appear to be one of the most compelling on the long side. I would plan to exit part of the position at 120 and even leave a smaller remainder for a possible move to the actual top of the cloud at 122.


As we are now above the weekly cloud formation I shall sit on the sidelines and see how the pattern develops during the course of this week.



The Japanese yen has continued to slide against the US dollar (and all other crosses) but it may be that the easy money on USD/JPY has been made in the near term.

The dollar appears to be stalling at the 85 level and even if we should reach into the cloud formation on the weekly chart, the 87.30 level would provide further strong resistance.






TRADE OPPORTUNITIES/SETUPS FOR MONDAY APRIL 11, 2011


The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
None of these setups should be seen as specifically opportune for the current trading session.
For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm





DBV  PowerShares DB G10 Currency Harvest  

The sector fund DBV, a proxy for the FX carry trade, has made an extraordinary recovery since the abrupt drop which followed the tragic events in Japan which occurred exactly one calendar month ago.

The fund provides long futures positions on the three G10 currencies associated with the highest interest rates and short futures positions on the three currencies associated with the lowest interest rates.

In my presentation at the International Traders Expo in London last Friday (and I decided to present wearing an eye patch in pirate mode - althoug I refrained from bringing the parrot) I discussed this chart and the follwing chart in some detail as a way of illustrating the dynamics of the carry trade.

As discussed the DBV fund presents a very simple and effective way for those traders who do not trade on a spot FX platform and yet who want to have a vehicle - via an ETF - which enables them to take a view on the direction of the high yielding currencies, primarily the Australian and Canadian dollars.

Asked by one of the conference participants for my longer term views on the commodity currencies I suggested that there is good reason to believe that these will continue to out-perform the US dollar and euro but when asked if they might become the new safe haven currencies I suggested that the volatility of the Australian dollar for example would not lend itself to be considered as such.




CarryTrade    

The last chart for today's commentary shows in a very useful fashion the foundations of the FX carry trade.

Tracked in blue is the spread between 2 year Australian and Japanese bonds and the actual spread values can be read on the left hand scale in basis points. The orange line tracks the path taken by the DBV fund discussed above and the right hand scale tracks the price of this ETF.

Just one qualification which would need to be inserted into the outlook for the yield differentials is the fact that, as there will likely be a a slow and persistent upward bias to Japanese interest rates, this will have the effect of squeezing the spread. However, there is still a sufficiently large spread that I would expect any changes in the appeal of the carry trade to be relatively minor in the intermediate term.