Currencies have caught my attention of late. My trading terminal is up and running almost all day long. Guess sometimes working does make a man better!
Friday was a pretty dull day in trading. There wasn't much activity for most part of the day and I was long on the Euro against the US Dollar. Staring at a screen with lines zigging and zagging may seem like an utterly boring thing to do on any day...but I was fixated. The Euro was weak since trading on Thursday. I read recommendations of people being short on the Euro. I got a little scared. I thought, "If so many people are short, then what on earth am I doing by being Long?" Thankfully for me, my mind prevailed over my heart and I stay put in my position. I kept on adding to my Long on every sign of weakness on the Euro. The benefits of Leverage were not lost on me, but at the same time I hesitated in putting a Stop Loss in case the trade went against me.
I continue to be fascinated by how a group of people react to news. Every time I see a reaction, the engineer in me reminds itself of the Response of a 2nd order system to a Step Input. Initially, the response overshoots and then undershoots, but doesn't retrace the entire path. It then overshoots again, but not till the high it hit in the first advance. It moves up and down, up and down, eventually settling down to a 'rational' level, The same thing happens in the markets, whether equity, commodity or currency.
The uneventful trading almost lulled me into sleep when I saw a sudden spurt in the Euro. Not much in percentage terms, but compared to what it had been doing all day, it was significant. My Long position started rearing its profitable head and I, went about trying to pinpoint a reason for the spurt.
I, along with a lot of others, am bearish on the US economy. The burgeoning trade deficit, housing market meltdown, after effects of the string of successive interest rate hikes, are just some of the reasons for my being negative on the prospects of the US economy in the near term. All this meant that the poor US Dollar was in for a period of weakness against major currencies.
At the same time, one could not be blind to the events unfolding in Europe. Interest rates had been hiked from 2% to 3.75% between December 05 and March 07. Strong economic growth - 2.8% last year; its best performance since 2001 - implied to me that the Euro was rising against the US Dollar not so much due to the 'dollar weakness' as much due to underlying fundamental strength. The latter meant that it was a more sustainable and justifiable reason for being on the Long side of the EUR-USD trade.
It is also interesting to note the political reactions of people within the Euro zone to the Euro appreciation. Germany, which is the Euro zone's biggest exporter, has remained silent on the strong Euro. This isn't really surprising, as its exports are mainly made up of Intermediate goods, which are in high levels of demand globally. The diversified nature of demand means that Germany isn't too worried about the slowing US economy.
The country where people are whining the most is France, which has seen the highest growth in unit labor costs. High unit labor costs implies that it was losing its competitive edge vis-a-vis other countries. A very strong reason to cry foul indeed! Its election time too...so it isn't really surprising that calls for Euro depreciation are strongest from France. Isn't it far easier to blame the strong Euro rather than demanding the vote bank to go slow on wage growth?
As expected, the reason that was behind the spurt in the Euro was news that the US economy had grown at a below expectation 1.3% in the first quarter. Spending on consumer durables rose 7.8%. This growth disappointed analysts and market players who then fell over one another to send the Euro to its all time high against the US Dollar. Key inflation gauges shot up 3.4% while core prices were up 2.2%. This prompted speculation that the Fed would have to raise rates some more in the future. Rising rates would most definitely worsen the already battered housing market scenario, leading to a downward spiraling domino effect. The Fed is in an unenviable situation!
Net Result: A lot of freshly initiated longs and short covering from the previous day provided strength to the Euro.
This brings me to the crux of this topic. Alternative perceptions. Its fascinating to see widely different reactions to the same stimuli.
The US economy slows --> Market players unhappy --> Sell the US Dollar --> Happy Germans --> Sad French --> Stoic European Central Bank --> Happy me...
To round out, I am still Long on the Euro. I don't know for how long this view will hold...but it does...for the moment atleast. I am keeping my eyes open for any stimulus that could cause an avalanche of disparate reactions. Its these very situations that turn out to be very profitable!
I continue to be fascinated by how a group of people react to news. Every time I see a reaction, the engineer in me reminds itself of the Response of a 2nd order system to a Step Input. Initially, the response overshoots and then undershoots, but doesn't retrace the entire path. It then overshoots again, but not till the high it hit in the first advance. It moves up and down, up and down, eventually settling down to a 'rational' level, The same thing happens in the markets, whether equity, commodity or currency.
The uneventful trading almost lulled me into sleep when I saw a sudden spurt in the Euro. Not much in percentage terms, but compared to what it had been doing all day, it was significant. My Long position started rearing its profitable head and I, went about trying to pinpoint a reason for the spurt.
I, along with a lot of others, am bearish on the US economy. The burgeoning trade deficit, housing market meltdown, after effects of the string of successive interest rate hikes, are just some of the reasons for my being negative on the prospects of the US economy in the near term. All this meant that the poor US Dollar was in for a period of weakness against major currencies.
At the same time, one could not be blind to the events unfolding in Europe. Interest rates had been hiked from 2% to 3.75% between December 05 and March 07. Strong economic growth - 2.8% last year; its best performance since 2001 - implied to me that the Euro was rising against the US Dollar not so much due to the 'dollar weakness' as much due to underlying fundamental strength. The latter meant that it was a more sustainable and justifiable reason for being on the Long side of the EUR-USD trade.
It is also interesting to note the political reactions of people within the Euro zone to the Euro appreciation. Germany, which is the Euro zone's biggest exporter, has remained silent on the strong Euro. This isn't really surprising, as its exports are mainly made up of Intermediate goods, which are in high levels of demand globally. The diversified nature of demand means that Germany isn't too worried about the slowing US economy.
The country where people are whining the most is France, which has seen the highest growth in unit labor costs. High unit labor costs implies that it was losing its competitive edge vis-a-vis other countries. A very strong reason to cry foul indeed! Its election time too...so it isn't really surprising that calls for Euro depreciation are strongest from France. Isn't it far easier to blame the strong Euro rather than demanding the vote bank to go slow on wage growth?
As expected, the reason that was behind the spurt in the Euro was news that the US economy had grown at a below expectation 1.3% in the first quarter. Spending on consumer durables rose 7.8%. This growth disappointed analysts and market players who then fell over one another to send the Euro to its all time high against the US Dollar. Key inflation gauges shot up 3.4% while core prices were up 2.2%. This prompted speculation that the Fed would have to raise rates some more in the future. Rising rates would most definitely worsen the already battered housing market scenario, leading to a downward spiraling domino effect. The Fed is in an unenviable situation!
Net Result: A lot of freshly initiated longs and short covering from the previous day provided strength to the Euro.
This brings me to the crux of this topic. Alternative perceptions. Its fascinating to see widely different reactions to the same stimuli.
The US economy slows --> Market players unhappy --> Sell the US Dollar --> Happy Germans --> Sad French --> Stoic European Central Bank --> Happy me...
To round out, I am still Long on the Euro. I don't know for how long this view will hold...but it does...for the moment atleast. I am keeping my eyes open for any stimulus that could cause an avalanche of disparate reactions. Its these very situations that turn out to be very profitable!
