Betting on Uncertainty - making 60 pip profit

Announcement of a rescue plan by the Treasury Secretary Henry Paulson – aiming to clear the banks' balance sheets – helped U.S. indexes to rose nearly 7 percent in the last two days of previous week. The plan must be passed by the congress when some members, especially from the Democrats, look reluctant to give the Treasury that huge power without making progress on their own policies.

It seems the bill will be passed but no earlier than this Friday. It is also noticeable to remember that the last week gains in equity indexes are mostly thanks to banning of short selling in the U.S. and some European and Asian markets.

In this environment I think the U.S. dollar could suffer in the medium term. The market will be flooded by $700B in coming months should the plan be executed.

But for this Monday, I found it a good time for buying Yen: 1- I thought that this uncertainty will affect the market sentiment negatively. 2- I also see that most of the optimism is priced at least in a daily-basis

I sold USDJPY at 107.07, making 60 pips profit when I closed it at 106.47. In my view, there are still much more room for appreciation of Yen (not just against dollar) in a week that is full of uncertainty and likely negative economic data.

Taking 40 pip profit

I sold AUDJPY last night after U.S. market close. It was when:

• Freddie Mac and Fannie Mea plunged near 20 percent on speculation that the government is going to rescue the two struggling companies.
• Fear of credit crunch cast its shadow again and caused equity indexes to drop about 1.5 percent.
• Oil was somewhat higher on possibility of interruption in supply by tropical storm Fay.
  Bank of Australia was due to release the minutes of its August meeting and it was expected to reflect policymakers' concerns about slowing economy.
• Bank of Japan was also expected to announce its decision on interest rate at 15:30 local time, highly anticipated to hold it at 0.5 percent and express concerns on growth.
  

So I find it the best time to sell Aussie, and I selected the Japanese yen as the partner, targeting both reducing carry-trading and negative impact from BOA Minutes.

The position closed automatically near the support, resulting in 40 pip profit. It was about 30 minutes before the release of the bank's minutes but I was comfortable with the result and didn't follow market after that.

Case Study: Reaction to UK Retail Sales

MPC's minutes on Wednesday helped sterling to appreciate against major currencies when it showed that there was a vote for an increase in interest rate. It also showed that they want to have more data before any decision on changing the rate and it was when Retail Sales and GDP were ahead.

Retail sales in UK dropped the most in decades, -3.9 percent, and sterling depreciate in response. But I think the opportunity was missed well before the data:

• The best time for selling pound might be probably at the midnight of Central Europe, when technical data were increasingly showing divergence (e.g. RSI divergence and MACD crossover in GBPJPY chart).


• And before the release, some weak economic reports from euro-zone such as German IFO and Euro PMI in addition to this fact that more concerning data are ahead from US housing markets were a trigger to the market to buy back the Yen as reducing carry trading.

Inflation vs. Risk, how it can affect carry trading

Although the shadow of inflation increasingly cast itself on equity markets around the world, but it seems there is very limited impact on carry trading. It is relatively different to what it used to be six month ago. At that time it was the high level of risk-aversion, affecting both equity markets and carry trading in the same direction. But at this time, inflation is the main driving force, which in one hand negatively affects the stock markets, and in other hand increases the possibility of higher levels in interest rates globally.