Risk Aversion Takes Root
20/05/10 17:48
PTC Members Warned and Aware of Impending
Correction
It is no surprise to Pro Traders Club members that full scale risk aversion has taken root, as the negative outlook for risk has been shared well in advance by its host. We are choosing our trades carefully on AUDJPY strategies as we wait for market's to re balance. I anticipate that this may take a few months. In the meantime, we will adjust our models to accommodate the increased vol. The overall market pullback is a welcome event we have been waiting for and I believe some very good opportunities will result in the risk class. This correction is a result of the weak foundation and deflated life preservers thrown at the market following the 2008 crisis. We have said in countless PTC episodes that risk on such weak footing is not sustainable. Our job as traders is to trade based on how we anticipate the market will perceive information flow.
I love this market because everyone has the ability to find their niche. We have outperformed PHD economists and are proud of it. I have to say that the views shared in PTC have been quite accurate over the years. We miss a few trends, but we can't see everything. The EURUSD for example; post crisis, the pair was trading at 1.2500 to 1.3000 and we were bearish because we felt the EMU and it's constituents were beginning to disintegrate with weak and non producing regions being weighed down by the impact of the crisis. It never made any sense to us. We missed the EURUSD rally to 1.5000+ and the fundamentals we anticipated finally set in and have taken us to where we are today, so we were right on our fundamental view, but wrong on timing. We can live with it, since we we called a long AUD against a basket when AUDUSD was at .6500.
It is no surprise to Pro Traders Club members that full scale risk aversion has taken root, as the negative outlook for risk has been shared well in advance by its host. We are choosing our trades carefully on AUDJPY strategies as we wait for market's to re balance. I anticipate that this may take a few months. In the meantime, we will adjust our models to accommodate the increased vol. The overall market pullback is a welcome event we have been waiting for and I believe some very good opportunities will result in the risk class. This correction is a result of the weak foundation and deflated life preservers thrown at the market following the 2008 crisis. We have said in countless PTC episodes that risk on such weak footing is not sustainable. Our job as traders is to trade based on how we anticipate the market will perceive information flow.
I love this market because everyone has the ability to find their niche. We have outperformed PHD economists and are proud of it. I have to say that the views shared in PTC have been quite accurate over the years. We miss a few trends, but we can't see everything. The EURUSD for example; post crisis, the pair was trading at 1.2500 to 1.3000 and we were bearish because we felt the EMU and it's constituents were beginning to disintegrate with weak and non producing regions being weighed down by the impact of the crisis. It never made any sense to us. We missed the EURUSD rally to 1.5000+ and the fundamentals we anticipated finally set in and have taken us to where we are today, so we were right on our fundamental view, but wrong on timing. We can live with it, since we we called a long AUD against a basket when AUDUSD was at .6500.
CAD
Given the volatile market backdrop, the risk is for a weaker CAD should core CPI come in under expectations tomorrow as the possibility of a June rate hike by the BoC could be further priced out of the market's expectation. Currently, the market is pricing in 12bp for the June BoC rate meeting. The BoC will have to weigh the recent market volatility and drop in oil prices against the very strong April Canadian employment report in its June policy rate decision. Ahead also is the Q1 GDP report released on May 31. GDP growth is likely increase from Q4. Our economists expect the first BoC rate hike to occur at the July 20th policy meeting.
AUD and CAD remain highly correlated to the S&P 500.Since the May 6 US equity market capitulation event, CAD has performed better than AUD likely because the BoC will commence a tightening cycle in the near-term, while the RBA will be pausing in its tightening cycle. AUD has also been negatively affected by a scaling back of expectations for a CNY revaluation. For the year, the market is pricing in approximately 132 basis points of tightening by the BoC. Ahead, we continue to favour CAD against non-USD crosses.
Source: UBS, Bloomberg, Chris Lori