In April 2002 we published a report entitled "Sell Dollars Wear Diamonds." This piece was a detailed explanation of why we were selling Dollars against the Swiss Franc aggressively at 1.6500, now 1.2390, and why we disagreed with the majority of analysts who were then calling for the dollar to remain strong. The formula for working the direction of a currency pair is quite simple:
Trade Deficit/Surplus + Non Speculative Capital flow + Speculative Capital Flow = Direction
Taking the US dollar. We have a trade deficit of $42 billion a month so lets call that -$42. Yesterdays figures from the Federal reserve show foreign purchases of US bonds and agencies of $75 billion so we will put that in the non-spec capital as +$75. As ever the key is the speculative capital or "hot money" as we call it. This money looks to move form currency to currency in search of the greatest total return and is the biggest constituent of the Forex market; work out what the speculators are doing and you can generally work out where the currency is going. If speculative dollar selling is higher than the difference between the two, +$33 billion in this case, then the Greenback will fall.
A trade we put out for members yesterday afternoon is a good example of how important it is to follow the flow. Through our contacts we established that there was a large options related stop at 1.8980 and we placed a stop entry order accordingly, Cable was 1.9015 at the time. When this was triggered cable fell rapidly to 1.8840. This shows how important it is to follow the flow. Due to the way the currency options market works there are times when if the market rises then the options market makers have to buy and if it falls they have to sell. If the volatility price increases they have to do this in bigger amounts hence rapid movements.
Yesterday every Muppet imaginable was on CNBC calling for Cable at 2.00. It seems that all systems and momentum based hedge funds are similarly long. As members know we have been bullish of sterling for quite a while and have made good money from the "proud pound." Market's however are not one way and we know what pride comes before!
It was lovely to see Rolf Breuer, the head honcho at Deutsche Bank, extolling the virtues of Frankfurt on CNBC this morning, telling us how important it is to have such a nice working environment if one is to attract the best dealers. Methinks there's a funny smell here and it's not his aftershave! Having worked for the mighty German bank I think I am able to put this into perspective. Linking the words "German" and "best dealers" is an oxymoron and that is one of the reasons that Deutsche has it's main dealing floor in London. The main reason however is that Deutsche are unable to get their best, and I should add Anglo-Saxon, traders to work there as Frankfurt is such a hole. The Deutsche building is right next to the main park where all the cities drug dealers congregate and was one of the reasons that the whole Anglo-Saxon options team, that they poached from Citibank in 1995, threatened to resign en masse unless the whole desk was moved to London. The most successful dealers left in Frankfurt are the ones with syringes.
Harry
Comments