So Right That It Went Wrong – When They Say Sell, Better Buy

Strategists are an amazing breed of people which justifies their maleficent (harmful to all other creatures) salaries. Imagine, what are the chances of winning Toto more than once a year ?

It is because of their supreme ability to make you go “Sou Desu Ka”, a little sheepish and small, forgetting what they had said before that made you go wrong. For did I say, strategists are an amazing breed ? Born to go places, go on to run hedge funds and do big things, winning the Toto salaries many times over in their illustrious careers like our once-opon-a-time contributor, Dialastrategist is currently doing (hoping she would not read this).

I was scrolling through my In Box, trying to figure out where we went wrong and how we missed the biggest USD move so far, as CNBC pointed out, and I noticed some trends.

January started with an inordinate number of bullish USD calls which continued into February.

I quote an email received end Feb, “With the Fed likely to maintain its path of tapering, we add to our overweight position in the US dollar, relative to the euro.”

This is in addition to a host of bullish USD vs CAD, AUD and JPY ideas.
Private banks were sending out AUDCNH DCI ideas for clients long the AUD end Feb.

The AUDCNH was 5.46, pre PBoC shocker, it is 5.83 now and my heartfelt sympathies to those who were landed the CNH although I am quite sure your banker would have then had a list of CNH bonds to show to you.

There was also a whole barrage of EURUSD downside ideas at 1.3670, which turned out to be the low for the month. The tone turned to resentment before they shut up till now.

The EM view was equally downbeat with more than its fair share of cautionary notes early in April which would have caused one to miss out on further appreciation in the lot of them.

As we acclimatize and ease ourselves into this new butt warming EM risk-on situation egged by the landslide victory of the new populist Indian government, volatility for almost every asset class, including the VIX index, is at its 5 year lows, except for perhaps, Coffee.

I read and re-read the new strategies in my mail box.

One of them was making a counter argument that if the equity markets were so high and volatility so low, it means that strong data out of the US cannot hurt the growth story if the Fed remains nonchalant.

So that makes me feel like a big fat idiot for trading for good data and getting the wrong results.

It feels like we are working backwards to get the answers here. That the direction of the equity and vol markets decide that the data is good (for growth) or bad.

Not true at all. The strategists were so good that they were wrong. Because the investors and traders were all on their side into the strong USD story that it became a buy on rumour and sell on fact scenario. There is no blame to be laid at all.

All we know now is that its been 10 weeks and the year to date changes in the USD game has been rewarding to those who sold on rumour and bought on fact.

So much for all the taper fears of early this year, the 10Y  US treasury note is back to a 9 month low. And the arguments for a “new neutral” slow and sluggishingly growing economy, seem to be gaining universal acceptance.

Now that the strategists are saying it is mostly ok, we could consider positioning into this week’s Fed’s minutes on 22 May, that maybe we are just all too much in the “ok” boat.

I would call for a correction in the USD towards strengthening (note the DXY Index breaking the Ichimoku cloud)  and a correction in equity indices.

The best bets would be in the USD vs the major currencies such as the EUR, with the parliamentary elections, the GBP where Governor Carney is warning on property prices and the AUD where few can give credible explanations for its phenomenal move.

I am not sure about the EM situation except that it worries me, I do not like the idea of the flight to carry we are seeing in the currencies now and Modi in India cannot change the El Nino weather that is about to hit us. Thus the bullish USD trade would work as well.

Then again, I will never make a good strategist because I will probably get the bank sued by apologising for my bad calls.

Sou Desu Ka, and good luck for the week.