Tag: $usdkrw

Is “Short RMB” Still the Fairest of Them All?

Posted on by dev_team

Before August of this year, the answer was a no-brainer.  Remember, our imperative is to buy low. I have written multiple times about the Chinese currency both before and after the August 11th devaluation.

My position had been clear – given the vol market’s extremely low probability on a devaluation, “Short RMB” was a mandatory, superior risk/reward bet, but not the kind of trade on which you would want to blow all of your capital. There was no ex-ante certainty of timing or magnitude.

Now that the second wave of the move is in progress, what am I doing? In markets like USDCNH, with expensive bid-offers, there is extra value in not “fidgeting” and just running my positions.  So I am sticking with my options, which are now deep-in-the-money and are essentially outright positions.

But that has been the case for a few months. Am I going to adjust my positions? My book The Next Perfect Trade discusses the currency pendulums in the first chapter. Normally, once a major trend has launched I would be piling in, as if possessed by macro demons, and not worrying at all about not getting the “cheapest level”.

I am, however, holding steady (while very substantial) positions, because long USDCNH is no longer a clearly “superior” trade according to my strategic language.

I still think it is a positive expectation trade: the devaluation is more likely to be equal or greater than projected by the market. But the question I am asking is, “are there more dominant trades out there?”

Let us disregard the scenario of re-appreciation of RMB as unlikely, and break down the market analysis into two scenarios for the next couple years:

  1. Relatively stable or slowly depreciating RMB
  2. Massive depreciation either because of the government’s loss of control or a radical policy decision

While long USDCNH looks good in light of Chapter 1 of my book (entitled “Trend”), it has problems with Chapter 2 (“Carry”). A slow depreciation may or may not catch up to the 3.4% devaluation priced in the 1yr forward. Many of us would agree that if Scenario 1 is a given, then the trade looks mediocre.

Scenario 2 is obviously great, but I seek trades that work in the broadest range of economic outcomes. In other words, are there trades that are as good in Scenario 1, but also hold up in Scenario 2?

I have two examples:

  • Long US bonds, a trade which I like for reasons I’ve written about ad nauseam; and
  • Long USDKRW, which while not clearly dominant, offers a nice diversification.

With positive carry in the bonds’ case and low carry in KRW case, we don’t have to worry about the velocity of RMB devaluation. Both trades are likely to get a tailwind from a lower Yuan, regardless of timing. And both trades have the potential to work even with stable RMB.

One caveat with KRW and has move quite a bit already, while not having the same overwhelming secular trend and superior risk profile as the bonds.

But both trades are set to do extremely well in Scenario 2, a catastrophic devaluation.

To summarize: While I like and will keep the USDCNH trade, I see a lack of clear dominance and am concerned over awkward liquidity. I prefer to focus my risk on long US bond futures and consider diversifying into USDKRW.

Good luck.

Currency values amidst the commotion

Posted on by dev_team

As the Greco-Chinese drama unfolds in its ebbs and flows, strategic clarity is paramount. First, let’s separate opinions from facts.

  • It is still completely unknown whether there will be any material economic fallout from the Greece crisis (see my post from June 28th http://alexgurevich.tumblr.com/post/122713740067/greece-and-china-crisis-doesnt-happen-on).
  • It is safe to assume that there will be a global deflationary shock wave resulting from Chinese stock market crash and trading freeze-up. Hard to imagine recent events to have no effect on consumption and investment. Recent fall in commodity prices is an example.

In this post I will go over a few world currencies and their connection to the recent events.

USA:

  • Facts: US job market appears to be steadily improving. The Fed exited the QE program and is contemplating a timeline for tightening.
  • Opinions widely differ and how well the economy is actually doing and whether there is any imminent inflation threat.
  • Currency: Long dollar continues to be the theme as it is favored by the policy divergence and spiraling pressure on the Emerging Market and falling commodity prices.

Euroland:

  • Facts: The economic performance appears improving, but there is no immediate threat of inflation. Greek crisis postpones any possibility of slowing down the QE.
  • Opinions differ on the full outcome and impact of the Greek debacle.
  • Currency: Short EURUSD remains my core position. The QE is in progress regardless of the Greek outcome. And any rebound in the Eurozone economy is not necessarily currency positive as I’ve written on May 3, 2015. http://alexgurevich.tumblr.com/post/118071999752/eurozone-economy-bull-currency-bear 

    • China:

  • Facts: The economy has slowed down from its earlier tremendous pace and needs to work out some imbalances. The stock market is going through a massive correction and extreme volatility.
  • Opinions differ on how sound the overall economy is and on the necessity of the RMB devaluation.
  • Currency: Outright and options bets may offer a positive risk-reward as the potential for significant devaluation appeares underpriced. But there is no certainty of success and high likelihood of getting the timing wrong. Betting on the currency requires a strong China view.

    • Japan:

    • Facts: The inflation target is still not achieved and the economy is still struggling to accelerate. The QE is in progress and current government and central bank are extremely committed to achieving their inflation targets.
    • Opinions differ about the country’s economic future.
    • Currency: As short-term panic typically cause a flight to JPY as one of the “safe haven” currencies, I see any dips in USDJPY as an opportunity to build long USDJPY position. Indeed, Chinese slowdown is deflationary, and of all the central banks BOJ has the prime political mandate and tools to fight deflation. So the market’s tendency to strengthen the yen during stock market dips is completely counter-economic and a good entry opportunity.  

    Australia:

  • Facts: The economy is experiencing headwind from the China slowdown and falling commodity prices.
  • Opinions differ on whether the currency has reached an attractive valuation after the recent plunge.
  • Currency: Any bets the AUD have a strong component of expressing opinion on Chinese economic growth.

    • Emerging market:

  • Facts: Producer countries are suffering from falling commodity prices. The broad dollar strength is putting pressure on all dollar-funded carry trades.
  • Opinions differ on whether countries like Brazil or Turkey now represent value.
  • Currency strategy: I believe caution is still in order when investing in EM as the trend is abysmal, but if your portfolio is overall crisis resistant, some bottom-fishing may be in order.

    • South Korea:

    • Facts: Japanese currency weakness and Chinese slowdown are both deflationary for their neighbor.
    • Opinions differ of the overall economic health and debt problems.
    • Currency: I think KRW is on one-way train and this train is not going North. The current environment seems to offer very low chance of significant KRW appreciation. I am in favor of long USDKRW.

    To summarize: long dollar vs. USD, JPY, and KRW seems to be a good risk-reward proposition regardless of the crisis outcome.

    Image: “Money changer” by calamur

    Chart source: Yahoo! Finance

    Rotating into lower risk long dollar trades

    Posted on by dev_team

    The dollar chart is no longer parabolic. It’s vertical.

    This by itself is not an indicator, that we have to close the long dollar trade. My general feeling is “Why give up on a good trend, while it lasts?”

    On January 1st, 2015 I posted that I had reduced my short Yen risk and focused on short Euro. My relatively conservative risk commitment at the beginning of the year allowed me to build a short Swiss (long USDCHF), after the SNB surprise action had sent the currency into the opposite of freefall.

    But now both EURUSD and USDCHF trades have moved enough to be considered mature along with USDJPY. 

    Even the secular dollar bulls, who are calling for EUR to go back to 0.80 and JPY to 150, have to admit that more than half on the move has already taken place.

    When EURUSD was at 1.35, it was easy for to say “I will stay short no matter what. If it goes a few % against me, I will just wait it out.” Now there is a lot to lose from 1.05.

    So, are you prepared to sit on your short EUR position, if it goes back to say 1.15? Maybe you are. But it is not crazy for even the greatest dollar bulls to think of some risk management. For some it means reducing positions, for some trailing stops. Personally, I prefer the former.

    As I am taking some profits on EUR and CHF, my thoughts are turning to currencies that haven’t moved quite as much and still have space to catch up in the devaluation race.

    You might have guessed what part of the world I am thinking of from the picture upfront. China, Taiwan, Australia, New Zealand, Korea, and so on.

    Australia in fact has already moved a lot as well. But New Zealand, as I have written before, looks very expensive against its larger neighbor. So I have recently decided to swallow the negative carry pill and establish a small NZDUSD short.

    China is the focus of raging debates and what is actually going on there is beyond the scope of this post.

    I would like to have a better look at South Korea, which delivered a surprise rate cut last week, confirming its participation in the race to the bottom.

    Indeed KRW has weakened somewhat against the US dollar. But the 10% retreat to the highs is not that substantial. If you substitute USD by the currency of their closer neighbor – JPY, you will see a very different picture (lower number means stronger KRW).

    So we have a theme similar with China and New Zealand: the carry is not great (though closer to zero in the case of Korea), looks weaker relative to USD, but strong relative to some key counterparties.

    I have to confess, I am not at all an expert on Korean economy. 

    Rather than to analyze specific countries, I want to focus on the general theme. How much downside is really there in being short USDNZD, long USDCNY and USDKRW? 

    Yes you might have to eat some negative carry, but are you worried about catastrophic appreciation of any of those currencies?

    So now that we have (hopefully) booked some profits on easy positive carry trend trades in EUR, JPY, and CHF; is it worth to pay some carry in places where the downside is not that big?

    I find it hard to imagine the world in which the broad dollar continues and the “catch-up” currencies do ont devalue as well.