NFP at +217k. With subdued inflatioary pressure thru Oil and world growth lucklustre along with the prob. of a Fed rate hike only at 19% for Sept. I see the timetable being pushed out to 2016. An interesting point being whether China will do anything to upset the applecart with all those USD reserves they have. In any event it all points to the currencies continuing to decline and I will be looking for better levels to get some shorts on esp. Euro.

Probability Fed Rate Hike or Not

Have fielded a few questions of late on how one can work out the probability of a rate change? Go to the Fedwatch calculator by CME is the simple answer, where you can also see a worked example for those interested in the simple math. Essentially the market is looking to the futures market to determine the probability (the larger the +difference between the expected month end FedFunds effective rate per month end futures Vs last month end effective rate the higher the prob. of a hike). Thus as I tell all my students/retail investors you should track the probability of expected cuts/hikes/no action across the majors as well as changes in yield curve differences for key tenors. This will add to your decision making capabilities and give you an edge over those that are ignoring cues from the market.

When one considers the decrease in prob. for a Fed rate hike in Sept, the equities rout of late as well as being funding currencies it is no coincidence that we have seen EUR and JPY shorts decrease. Frankly this is a great time to think about better levels for some Euro shorts.

RBA holds rate at 2%

In line with expectations the RBA held rates at 2% looking for more confirmation on market conditions. The wait and see comments were justified this time round with the last couple of weeks making the picture more muddled. Aussie as a result held fairly steady.

IMM positioning

Aggregate long USD position decreased again this week by a further $8bln - again mainly due to decrease in EUR and JPY net shorts but also there was a build of EUR longs which is probably due to a <40% chance of a Sept rate hike which as i noted last time may be pushed further out to end of year. With equity markets still showing signs of volatility this has also aided the smaller USD position. With Oil recovering slightly this has also seen a decrease in the net short CAD - with Saudi now looking like they may talk about pricing which they have been reluctant to do this is a positive for that market. I think when Oil and Cad break that will be a great one to ride. Lastly Sterling was shown to have a net long position but lets see how that one held up with spot taking a beating last week.

IMM positioning

In July I noted how shorts were continuing to increase in all but the cable and swissy. The latest report shows a different story with the aggregate USD long position decreasing by 5.3bln in the past week. Most of this was thru EUR and JPY short covering which given the extreme shorts prior is no surprise, especially since a Sept rate hike is decreasing in probability. Most other currencies decreased net shorts as well but not hugely. If one looks at euro which hit a high of 1.1713 and Yen dropping under 117 this week then this has played out nicely with some help of equities and one would think the decreasing short posions have probably continued into this week.

I still favour parity for the Euro but will remain cautious for the time being whilst the rout in equities continues and perhaps a little more positive reinforcement for the US rate hike, which with global growth slowing might even be pushed out to 2016.

Hmm.. ouch

My friends ask me why I invest in currencies. Well the past couple weeks is your answer. That has to hurt even the most seasoned equity traders and I can just imagine what my old firm is telling clients - thats inbetween the margin calls of course. Though I am not laughing as my own equity portfolio got crushed & my brokers call of 6,000 only a few weeks ago looks a long way off now... a long way off.

Not that currencies are easy but the ability to be nimble has to be on the side of FX. The whole world has been short commodity currencies ever since oil and interest rate differentials began to fall not to mention most other commodities and the last week has not let me down (lose some / win some as the saying goes). Just look at the GDT milk auctions to see how well thats been going. I still buy my one carton every day !

I am not forecasting anything here, but for all those aussies out there please ask yourself how the housing market is going to hold up in Sydney. Most of the foreign buyers just lost one big chunk of their wealth. With banks probably in need to protect their profits, now is probably a good time to consider downsizing before the return on that asset class dissappears as well. Investment basics here but I'd rather lose 20% on 1mm then on 2mm - it is just a roof and four walls after all and just a matter of time.

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