Portfolio Performance : +54.76%
US Dollar Barometer stands at +3
Trade Recommendation : Long USD/CHF
Bottomline : Equity market rebounded in Asian trade. I am not taking any trades even though my gut feeling is telling me that things might turn better for the equity market. Yesterday's near death experience for the equity market twisted a bit of the market's expectation. Yes, it is clear that the markets want the US to take on the bailout package. The 777 point drop on the Dow had already taken away over 1 trillion in market cap in the equity market. I dont know how much more it will cause if they delay it.
Tuesday, September 30, 2008
Monday, September 29, 2008
Portfolio Performance : +54.76%
Actions : Closed my long USD/CHF on profit taking, which helped the performance of the portfolio. Systemic risk has spread and the contagion has appeared to affect Europe. Pressure is on the equity market. Commodities have slid, as expected.
I have sidetracked a bit to focus a paper on equity price movements instead of foreign exchange.
In "Fundamental information and share prices in Japan: evidence from earnings surprises and management predictions" by Robert M.Conroy, Robert S.Harris and Young S.Park 1998
The paper investigates whether corporate fundamentals, as captured by corporate earnings and especially management forecasts of such earnings, provide significant insights into Japanese stock prices.
All in all, the results from their paper show an important and changing role for earnings information in Japanes market pricing. Three clear empirical patterns stand out. Japanese stock prices react significantly to innnovations in information about company-specific earnings fundamentals. Price reactions are much more pronounced to management forecasts of future earnings than to announcements of current earnings. Finally, the pattern of price reactions to earnings news changes over time. The patterns of change are broadly consistent with the view that the alleged bubble period of the 1980's did see a smaller role for fundamental information about corporate performance. Moreover, reactions to bad news became particularly more pronounced after the bubble period ended.
They found that current stock price depends on expectations of both near term and long term earnings. As a result, share price rise if current earnings give investors new information about future performance. One would expect management forecasts of next year's earnings to elicit even stronger price responses. Also, in a bubble, when attenuated price responses to earnings fundamentals in this period are due to a speculative bubble or to investor's rational choices not to revise expectations of future earnings may ultimately be a matter of semantics. What is clear is that pricing effects appear to change with general market conditions. Apparently when market conditions have turned sour, specific company announcements result in more severe price changes. In more buoyant markets, such news may be given less weight as all boats are viewed a s rising.
Actions : Closed my long USD/CHF on profit taking, which helped the performance of the portfolio. Systemic risk has spread and the contagion has appeared to affect Europe. Pressure is on the equity market. Commodities have slid, as expected.
I have sidetracked a bit to focus a paper on equity price movements instead of foreign exchange.
In "Fundamental information and share prices in Japan: evidence from earnings surprises and management predictions" by Robert M.Conroy, Robert S.Harris and Young S.Park 1998
The paper investigates whether corporate fundamentals, as captured by corporate earnings and especially management forecasts of such earnings, provide significant insights into Japanese stock prices.
All in all, the results from their paper show an important and changing role for earnings information in Japanes market pricing. Three clear empirical patterns stand out. Japanese stock prices react significantly to innnovations in information about company-specific earnings fundamentals. Price reactions are much more pronounced to management forecasts of future earnings than to announcements of current earnings. Finally, the pattern of price reactions to earnings news changes over time. The patterns of change are broadly consistent with the view that the alleged bubble period of the 1980's did see a smaller role for fundamental information about corporate performance. Moreover, reactions to bad news became particularly more pronounced after the bubble period ended.
They found that current stock price depends on expectations of both near term and long term earnings. As a result, share price rise if current earnings give investors new information about future performance. One would expect management forecasts of next year's earnings to elicit even stronger price responses. Also, in a bubble, when attenuated price responses to earnings fundamentals in this period are due to a speculative bubble or to investor's rational choices not to revise expectations of future earnings may ultimately be a matter of semantics. What is clear is that pricing effects appear to change with general market conditions. Apparently when market conditions have turned sour, specific company announcements result in more severe price changes. In more buoyant markets, such news may be given less weight as all boats are viewed a s rising.
Sunday, September 28, 2008
Portfolio Performance : +34.78%
US Dollar Barometer stands at +3
Trade Recommendation : Long USD/JPY
Bottomline : I am still in my long USD/CHF trade. The US Dollar retreated from the sharp spike a few days ago on anticipation that the bailout plan would not reach a consensus, but overall the US dollar is not dead. I think there are a lot of people out there who think that the US dollar would be doom. I continue to believe that commodities are in for a slide, including gold.
In "Can fluctuations in the consumption-wealth ratio help to predict exchange rates?" by Jorge Selaive and Vicente Tuesta, 2006
the authors have found that the consunption wealth ratio to be fairly accurate in predicting the nominal exchange rate.
The difficulty in predicting exchange rates using macro fundamentals has been a challenge in international macroeconomics since the seminal paper by Meese and Rogoff (1983). Mnay found that none of the proposed models were able to outperform a simple random walk.
In their paper Lettau and ledvigson (2001) attribute a key role of fluctuations in the aggregate consumption-wealth ratio for predicting stock returns over short and intermediate horizons. When excess returns are expected to be higher in the future, forward looking investors will react by increasing consumption out of current asset wealth and labour income. According to guo (2003), if Americans invest in foreign currencies, the returns of the portfolios will finally be a function, among other fatcors, of the relative depreciations or appreciations of the foreign currencies. This suggests a role for the consumption-wealth ratio to predict the nominal exchange rate.
The diagram below shows the consumption-wealth ratio as well as the exchange rate of the Canadian dollar.
The diagram shows that there is some relationship on the deviaiton of the consumption-wealth ratio and the future exchange rate.
The author argues that because the consumption-wealth ratio are strong predictors of asset returns, the consumption-wealth ratio may provide an excellent predictor of exchange rates. However, he found that the fluctuations in the consumption-wealth ratio does have a significant impact on FX forecasting and does help to a certain extent on forecasting FX abilities. He proposed further research to be done on how international macro-variables might affect FX rates, especially on bilateral net foreign asset position among countries, as Kilian and Taylor have previously found a significant relationship on the variables.
US Dollar Barometer stands at +3
Trade Recommendation : Long USD/JPY
Bottomline : I am still in my long USD/CHF trade. The US Dollar retreated from the sharp spike a few days ago on anticipation that the bailout plan would not reach a consensus, but overall the US dollar is not dead. I think there are a lot of people out there who think that the US dollar would be doom. I continue to believe that commodities are in for a slide, including gold.
In "Can fluctuations in the consumption-wealth ratio help to predict exchange rates?" by Jorge Selaive and Vicente Tuesta, 2006
the authors have found that the consunption wealth ratio to be fairly accurate in predicting the nominal exchange rate.
The difficulty in predicting exchange rates using macro fundamentals has been a challenge in international macroeconomics since the seminal paper by Meese and Rogoff (1983). Mnay found that none of the proposed models were able to outperform a simple random walk.
In their paper Lettau and ledvigson (2001) attribute a key role of fluctuations in the aggregate consumption-wealth ratio for predicting stock returns over short and intermediate horizons. When excess returns are expected to be higher in the future, forward looking investors will react by increasing consumption out of current asset wealth and labour income. According to guo (2003), if Americans invest in foreign currencies, the returns of the portfolios will finally be a function, among other fatcors, of the relative depreciations or appreciations of the foreign currencies. This suggests a role for the consumption-wealth ratio to predict the nominal exchange rate.
The diagram below shows the consumption-wealth ratio as well as the exchange rate of the Canadian dollar.
The diagram shows that there is some relationship on the deviaiton of the consumption-wealth ratio and the future exchange rate.
The author argues that because the consumption-wealth ratio are strong predictors of asset returns, the consumption-wealth ratio may provide an excellent predictor of exchange rates. However, he found that the fluctuations in the consumption-wealth ratio does have a significant impact on FX forecasting and does help to a certain extent on forecasting FX abilities. He proposed further research to be done on how international macro-variables might affect FX rates, especially on bilateral net foreign asset position among countries, as Kilian and Taylor have previously found a significant relationship on the variables.
Saturday, September 27, 2008
Portfolio Performance : +34.45%
US Dollar Barometer stands at +1
Trade Recommendation : Short EUR/USD
Bottomline : I am still in my long USD/CHF trade. I continue to be bullish on the US dollar. Quiet day for equity market today, probably signals that the market is tired. There is a swamp of bad news, the latest victim of the credit crisis is Washington Mutual. I am beginning to think that gold is turning into a massive speculative bubble soon, neutral on bonds, more positive on equities.
US Dollar Barometer stands at +1
Trade Recommendation : Short EUR/USD
Bottomline : I am still in my long USD/CHF trade. I continue to be bullish on the US dollar. Quiet day for equity market today, probably signals that the market is tired. There is a swamp of bad news, the latest victim of the credit crisis is Washington Mutual. I am beginning to think that gold is turning into a massive speculative bubble soon, neutral on bonds, more positive on equities.
Friday, September 26, 2008
Portfolio Performance : +31.05%
Trade Recommendation : Long USD/CHF
US Dollar Barometer stands at +4.5!
Bottomline : Strong day for the US Dollar, we might continue to see a rally for equities. Commodities are cracking, which is going to put some pressure on gold. There is a lot of flight to bonds, as credit is freezing up, but the bailout package will unwind a bit of nerves moving forward.
Trade Recommendation : Long USD/CHF
US Dollar Barometer stands at +4.5!
Bottomline : Strong day for the US Dollar, we might continue to see a rally for equities. Commodities are cracking, which is going to put some pressure on gold. There is a lot of flight to bonds, as credit is freezing up, but the bailout package will unwind a bit of nerves moving forward.
Wednesday, September 24, 2008
Portfolio Performance : +30.60%
US Dollar Barometer stands at +3.5
Bottomline : I continue to think that the equity market is bottoming out but we might see a rally only if the commodity market stops presurring the stock prices. The US Dollar has strengthened which might pressure gold and oil a bit.
In "Growth of China's foreign exchange reserve" by Zhang Shuguang and Zhang Bin, 2007
the authors examine the growth of the foreign exchange reserve impact on the balance of the Chinese central bank.
While the Chinese economy has been hailed for its success in maintaining high growth and low inflation over the past decade, structural problems, notably the excessive accumulation of the foreign exchange reserves have cast a shadow in the outlook for the country. China's foreign exchange reserves increased to $853.7 billion in February 2006, surpassing Japan to become the largest reserve holding in the world. The reservese exceeded $1 trillion at the end of 2006. At this rate, the Chinese reserves is expcted to hit $2 trillion by 2010.
Foreign exchange reserves are influenced by many factors, such as domestic economic structure, government policies and changes in the international economic climate. The effect of increasing the Chinese foreign exchange reserves on the national economy and monetary policy can be examined using the central bank's balance sheet. As demonstrated by the Balance Sheet of the Monetary Authority, the accumulation of foreign exchange reserves on the one hand increases the foreign exchange assets of the central bank, while on the other hand increases the base money and other reserves on the liability side. The additional base money is transmitted into the increase of money supply through the operation of the banking system and the money multiplier effects.
On the asset side of the equation, the bank's accumulation of foreign exchange reserves increases the proportion of foreign assets - with these growing rapidly, the bank has to limit the growth of domestic assets to stabilize the money supply and prices. Therefore, it is assumed that the central bank may keep the domestic asset level at the same level from 2005 to 2010.
Holding all other factors constant, the massive growth of foreign exchange reserves may lead to an increased supply of money in the market. To offset the money creation effect of the foreign exchange reserves, the Chinese central bank has started issuing trillion worths of bonds in 2003. Which means that the issuance of bonds is likely to increase in future. This will in return affect the structure and function of the domestic bond market in china. To attract commercial banks to buy up China's treasury bonds in future, they would have to increase interest rates, which will likely increase the cost of issuance of these bonds. If china allows the RMB to appreciate too much, it will have a dimishing effect on the FX reserves.
Another way to manage the growth rate of the reserves would be to compute the cost benefits of putting the capital to domestic use for the national welfare of the nation. Afterall, china has been lending resources to foreign countries for many years at the loss to the nation. That said, we measure the benefits of purchasing the US Treasury bonds and other bonds and deposits in foreign banks to the rate of return on domestic capital. Given that the US Treasuries have only given about 3-4% recently, it is more profitable for the bank to invest domestically. That said, the excessive accumulation of foreign exchange reserves is likely to incur substantial welfare losses on the chinese economy.
US Dollar Barometer stands at +3.5
Bottomline : I continue to think that the equity market is bottoming out but we might see a rally only if the commodity market stops presurring the stock prices. The US Dollar has strengthened which might pressure gold and oil a bit.
In "Growth of China's foreign exchange reserve" by Zhang Shuguang and Zhang Bin, 2007
the authors examine the growth of the foreign exchange reserve impact on the balance of the Chinese central bank.
While the Chinese economy has been hailed for its success in maintaining high growth and low inflation over the past decade, structural problems, notably the excessive accumulation of the foreign exchange reserves have cast a shadow in the outlook for the country. China's foreign exchange reserves increased to $853.7 billion in February 2006, surpassing Japan to become the largest reserve holding in the world. The reservese exceeded $1 trillion at the end of 2006. At this rate, the Chinese reserves is expcted to hit $2 trillion by 2010.
Foreign exchange reserves are influenced by many factors, such as domestic economic structure, government policies and changes in the international economic climate. The effect of increasing the Chinese foreign exchange reserves on the national economy and monetary policy can be examined using the central bank's balance sheet. As demonstrated by the Balance Sheet of the Monetary Authority, the accumulation of foreign exchange reserves on the one hand increases the foreign exchange assets of the central bank, while on the other hand increases the base money and other reserves on the liability side. The additional base money is transmitted into the increase of money supply through the operation of the banking system and the money multiplier effects.
On the asset side of the equation, the bank's accumulation of foreign exchange reserves increases the proportion of foreign assets - with these growing rapidly, the bank has to limit the growth of domestic assets to stabilize the money supply and prices. Therefore, it is assumed that the central bank may keep the domestic asset level at the same level from 2005 to 2010.
Holding all other factors constant, the massive growth of foreign exchange reserves may lead to an increased supply of money in the market. To offset the money creation effect of the foreign exchange reserves, the Chinese central bank has started issuing trillion worths of bonds in 2003. Which means that the issuance of bonds is likely to increase in future. This will in return affect the structure and function of the domestic bond market in china. To attract commercial banks to buy up China's treasury bonds in future, they would have to increase interest rates, which will likely increase the cost of issuance of these bonds. If china allows the RMB to appreciate too much, it will have a dimishing effect on the FX reserves.
Another way to manage the growth rate of the reserves would be to compute the cost benefits of putting the capital to domestic use for the national welfare of the nation. Afterall, china has been lending resources to foreign countries for many years at the loss to the nation. That said, we measure the benefits of purchasing the US Treasury bonds and other bonds and deposits in foreign banks to the rate of return on domestic capital. Given that the US Treasuries have only given about 3-4% recently, it is more profitable for the bank to invest domestically. That said, the excessive accumulation of foreign exchange reserves is likely to incur substantial welfare losses on the chinese economy.
Portfolio Performance : +30.09%
US Dollar Barometer stands at -2
Trade Recommendation : Short USD/CAD
Bottomline : Although the equity market wants to bottom, I think the commodity market might continue to pressure it lower first. I think once the US Congress agrees to buy those illiquid debts, the market will bounce but the ones who will benefit are those outside the US, namely China and perhaps Europe.
In What macro-innovation risks really are priced in Japan? by Chikashi Tsuji, 2007
The author examines the macroeconomic variables priced in japan. Asset prices generally react sensitively to unanticipated changes in the state of the macroeconomy. Standard finance theory concludes that an additional component of long run returns is required and acquired whenever a particular asset is influenced by systematic innovations in a variable and that no compensation can be earned by taking diversifiable risk.
Chen (1986) found that significantly priced factors in the US include industrial production, inflation risk premiums and the slope of the yield curve, which has spurred many other research on the area. However, the japanese stock market has its own unique history and characteristics. Hence priced macro-innovation risks naturally differ from those of the US.
Working from chen's model, the author found that of the five fatcors in Chen's model, only unanticipated changes in risk premium appear to have a significant effect on the Japanese stock market. Second, oil price changes are not priced in Japan although much differently in the US. Third, exchange rate related variables such as variability of trade and unanticipated changes in the exchange rate are not priced in Japan. Last and most significant, innovations in money supply and in gold and foreign exchange reserves are strongly priced in Japan.
In conclusion, the author argues that the domestic macro-innovation risks are not particularly important in Japan. The international factors mentioned above play a more significant role in the Japanese stock market than do domestic factors.
US Dollar Barometer stands at -2
Trade Recommendation : Short USD/CAD
Bottomline : Although the equity market wants to bottom, I think the commodity market might continue to pressure it lower first. I think once the US Congress agrees to buy those illiquid debts, the market will bounce but the ones who will benefit are those outside the US, namely China and perhaps Europe.
In What macro-innovation risks really are priced in Japan? by Chikashi Tsuji, 2007
The author examines the macroeconomic variables priced in japan. Asset prices generally react sensitively to unanticipated changes in the state of the macroeconomy. Standard finance theory concludes that an additional component of long run returns is required and acquired whenever a particular asset is influenced by systematic innovations in a variable and that no compensation can be earned by taking diversifiable risk.
Chen (1986) found that significantly priced factors in the US include industrial production, inflation risk premiums and the slope of the yield curve, which has spurred many other research on the area. However, the japanese stock market has its own unique history and characteristics. Hence priced macro-innovation risks naturally differ from those of the US.
Working from chen's model, the author found that of the five fatcors in Chen's model, only unanticipated changes in risk premium appear to have a significant effect on the Japanese stock market. Second, oil price changes are not priced in Japan although much differently in the US. Third, exchange rate related variables such as variability of trade and unanticipated changes in the exchange rate are not priced in Japan. Last and most significant, innovations in money supply and in gold and foreign exchange reserves are strongly priced in Japan.
In conclusion, the author argues that the domestic macro-innovation risks are not particularly important in Japan. The international factors mentioned above play a more significant role in the Japanese stock market than do domestic factors.
Sunday, September 21, 2008
Portfolio Performance : +29.51%
US Dollar stands at -0.5
Trade Recommendation : Long AUD/USD
Bottomline : I am beginning to think that equities are hitting a bottom very soon. Commodities are also starting to crack. The US dollar appeared to be very weak until the Fed came up with the bailout plan for the markets - that totally reversed things.
US Dollar stands at -0.5
Trade Recommendation : Long AUD/USD
Bottomline : I am beginning to think that equities are hitting a bottom very soon. Commodities are also starting to crack. The US dollar appeared to be very weak until the Fed came up with the bailout plan for the markets - that totally reversed things.
Saturday, September 20, 2008
Portfolio Performance : +29.49%
US Dollar stands at -1
Trade Recommendation : Long GBP/USD
Bottomline : Huge move in the market overnight. A key reversal of events, the government is stepping in to stop the short selling and doing everything to stop the failure of the system. US dollar is weakening now despite the rally in equities. Commodities to trend higher, Gold turning into a bubble. Equities have a little upside. I can't imagine what would happen once the SEC rule on short selling financials would stop.
US Dollar stands at -1
Trade Recommendation : Long GBP/USD
Bottomline : Huge move in the market overnight. A key reversal of events, the government is stepping in to stop the short selling and doing everything to stop the failure of the system. US dollar is weakening now despite the rally in equities. Commodities to trend higher, Gold turning into a bubble. Equities have a little upside. I can't imagine what would happen once the SEC rule on short selling financials would stop.
Thursday, September 18, 2008
Portfolio Performance : +29.29%
US Dollar Barometer stands at -3
Trade Recommendation : Sell USD/CHF
Bottomline : sold the dollar against the franc but it triggered my stop loss. Still early to call for a bottom for equities, but we are approaching one. Markets now questioning the value of the US dollar.
In When is money neutral under flexible exhange rates? by pekka Ahtiala, 2008 - the author studies the neutrality of money under flexible exchange rates in an extended Mundell Felming model.
The extended Mundell Fleming model is alive and well and continues to serve as a forecasting tool for most central banks and governments because it works empirically. The model suggests that under perfect capital mobility, monetary expansion is expansionary under flexible exchange rates, under the assumption of fixed prices. Under the extended Mundell Fleming model, it was shown that montary expansion is typically expansionary in the long run after being contractionary in the short run both for net creditors and net debtors.
US Dollar Barometer stands at -3
Trade Recommendation : Sell USD/CHF
Bottomline : sold the dollar against the franc but it triggered my stop loss. Still early to call for a bottom for equities, but we are approaching one. Markets now questioning the value of the US dollar.
In When is money neutral under flexible exhange rates? by pekka Ahtiala, 2008 - the author studies the neutrality of money under flexible exchange rates in an extended Mundell Felming model.
The extended Mundell Fleming model is alive and well and continues to serve as a forecasting tool for most central banks and governments because it works empirically. The model suggests that under perfect capital mobility, monetary expansion is expansionary under flexible exchange rates, under the assumption of fixed prices. Under the extended Mundell Fleming model, it was shown that montary expansion is typically expansionary in the long run after being contractionary in the short run both for net creditors and net debtors.
Portfolio Performance : +30.04%
US Dollar Barometer stands at +1
Trade Recommendation :Sell AUD/USD
Bottomline : Equities having a tough market. Gold has surged, as expected. The US dollar bulls are fighting, but I think the longer US dollar outlook is negative. The recent Bond rally might weaken a bit on higher yields. Commodities might stay supoorted but the longer term outlook for the asset is negative
Today, I wish to highlight work on "Exchange Rate Regimes : Middling Through" by Ashima Goyal (2006)
In the paper, Goyal says that most emerging markets are moving towards a regime that has higher exchange rate volatility and lower interest rate volatility. In his study of emerging markets, he noted that many countries have adopted a limited flexibility and managed float exchange rate regime. (see below) Independant float regimes have actually fallen
In looking at interest rate and FX volatility of various countries, he noted that a desirable characteristic of intermediate regimes would be to have low FX and interest rate volatility. Interest rate volatility should be lower than FX and be allowed to respond to domestic cycles, as their smoothing would minimize banking crisis, facilitate smooth working of the financial system and lower the burden of government debt. (Maybe Bernanke should have read his paper)
US Dollar Barometer stands at +1
Trade Recommendation :Sell AUD/USD
Bottomline : Equities having a tough market. Gold has surged, as expected. The US dollar bulls are fighting, but I think the longer US dollar outlook is negative. The recent Bond rally might weaken a bit on higher yields. Commodities might stay supoorted but the longer term outlook for the asset is negative
Today, I wish to highlight work on "Exchange Rate Regimes : Middling Through" by Ashima Goyal (2006)
In the paper, Goyal says that most emerging markets are moving towards a regime that has higher exchange rate volatility and lower interest rate volatility. In his study of emerging markets, he noted that many countries have adopted a limited flexibility and managed float exchange rate regime. (see below) Independant float regimes have actually fallen
In looking at interest rate and FX volatility of various countries, he noted that a desirable characteristic of intermediate regimes would be to have low FX and interest rate volatility. Interest rate volatility should be lower than FX and be allowed to respond to domestic cycles, as their smoothing would minimize banking crisis, facilitate smooth working of the financial system and lower the burden of government debt. (Maybe Bernanke should have read his paper)
Tuesday, September 16, 2008
Portfolio Performance : +30.03%
US Dollar stands at +1.5
Trade Recommendation : Long USD/JPY
Bottomline : What a weekend, big move in the markets after Lehman Bankruptcy. The Barclays vultures are now taking what is left of Lehman. AIG is next on the list. Citigroup maybe next (Check out the Chapter 11 listing for Lehman). Markets await the Fed decision rate. Consensus looking for a cut in interest rates, which could spur another commodity rally. This is going to be tough for the consumer and depressing for businesses. This is absolutely a tough environment for equities.
US Dollar stands at +1.5
Trade Recommendation : Long USD/JPY
Bottomline : What a weekend, big move in the markets after Lehman Bankruptcy. The Barclays vultures are now taking what is left of Lehman. AIG is next on the list. Citigroup maybe next (Check out the Chapter 11 listing for Lehman). Markets await the Fed decision rate. Consensus looking for a cut in interest rates, which could spur another commodity rally. This is going to be tough for the consumer and depressing for businesses. This is absolutely a tough environment for equities.
Monday, September 15, 2008
Portfolio Performance : +25.73%
US Dollar Barometer stands at -3
Trade Recommendation : Long EUR/USD
Bottomline : Tough market for equities. The media is focusing on Lehman over the weekend, shorts are looking at Merrill and AIG next. Commodities might rebound, I think it is good to put some short term tactical long positions in Gold. US dollar strength has weakened!
In A comparison of the accuracy of short term foreign exchange forecasting methods, Nigel Meade, 2002
The author made an attempt to examine the short term forecasts methods from linear and non-linear processes. In his tests, the measurement of point accuracy was achieved using a range of summary statistics coupled with tests of significance. The significance of directional accuracy was measured using Peseran and Timmerman's test and the associated theoretical profit assessed by simple trading rules.
Here are the results of the error measures. The MAE showed showed some evidence of greater accuracy for three series (2 hourly and 1 hourly). RMSE and Peseran and Timmerman test showed accuracy increasing with the frequency of observation. RMSE showed significantly greater accuracy than the no-change forecast for two-hourly, one-hourly and half-hourly data: in addition this greater accuracy persisted for multi-period horizons. The Peseran and Timmerman test showed significant predictive performance for four-hourly and more frequent data. This predictive performance persisted for multi-period horizons, at least ten periods for most half-hourly data sets for most methods. The application of the trading rule confirmed the existence of potentially profitable trading opportunities.
US Dollar Barometer stands at -3
Trade Recommendation : Long EUR/USD
Bottomline : Tough market for equities. The media is focusing on Lehman over the weekend, shorts are looking at Merrill and AIG next. Commodities might rebound, I think it is good to put some short term tactical long positions in Gold. US dollar strength has weakened!
In A comparison of the accuracy of short term foreign exchange forecasting methods, Nigel Meade, 2002
The author made an attempt to examine the short term forecasts methods from linear and non-linear processes. In his tests, the measurement of point accuracy was achieved using a range of summary statistics coupled with tests of significance. The significance of directional accuracy was measured using Peseran and Timmerman's test and the associated theoretical profit assessed by simple trading rules.
Here are the results of the error measures. The MAE showed showed some evidence of greater accuracy for three series (2 hourly and 1 hourly). RMSE and Peseran and Timmerman test showed accuracy increasing with the frequency of observation. RMSE showed significantly greater accuracy than the no-change forecast for two-hourly, one-hourly and half-hourly data: in addition this greater accuracy persisted for multi-period horizons. The Peseran and Timmerman test showed significant predictive performance for four-hourly and more frequent data. This predictive performance persisted for multi-period horizons, at least ten periods for most half-hourly data sets for most methods. The application of the trading rule confirmed the existence of potentially profitable trading opportunities.
Friday, September 12, 2008
Portfolio Performance : +25.73%
Actions : I exited my short USD/CHF position, helping the portfolio to recover its performance
US Dollar Barometer stands at +1.5
Trade Recommendation : Long USD / CHF
Bottomline : I think equities are set for a near term bounce. Commodities are also taking a pause from their decline. Market might trend range bound. Signs of fatigue is appearing.
Christelle Lecourt and Helene Raymond in Central Bank Interventions in Industrialized countries : A characterization based on survey results, 2006 did an interesting work on central bank interventions
Central Bank Interventions (CBI) seem to have negative effectiveness from empirical research. The main findings are that FX volatility have increased rather than been reduced, where the FX interventions frequently move in the wrong direction. Interventions done in coordination with other central banks have a larger impact than unilateral interventions conducted by a single bank. Several studies have also shown that the Central Bank statements - accompanied or not by actual interventions - can have a stabilizing effect on the exchange rate.
In theory, there are 3 channels through which interventions can act on the exchange rate : the monetary channel, the portfolio-adjustment channel and the signalling channel
1. The monetary channel involves non-sterilized of foreign exchange interventions, which is basically involving the changing the foreign exchange policy which leads to a change in the monetary policy and a change in the monetary base
2. The portfolio balance channel predicts that selling foreign foreign currency reserves will appreciate the domestic currency, whereas increasing reserves should depreciate the domestic currrency. Obstfeld (1982) has shown that however that in a Ricardian world, sterilized interventions can be ineffective even in the short term : it does not change the net wealth level of the private sector, nor its perceived composition. Empirical studies find no evidence that interventions alters exchange rate levels through a portfolio-balance channel - the main reason is that intervention amounts, although appear paramount are rather small when compared to the total daily activity in the foreign exchange market.
3. According to the signalling theory, central bank's interventions can recover some efficiency through the signal they convey on future policy. In the signalling theory, exchange rate levels are likely to be disturbed in the short term only if the information received by traders is strictly non-anticipated. When a central bank intervenes in the FX market, it conveys a signal, which indicates for instance a change in future monetary policy. If this signal is expected by the market, the information given by the signal is already incorporated in the previous day's spot quote. By contrast, if the signal is "new", it will immediately change the current FX value.
According to the authors, through their survey of central banks, the signalling effect is clearly put forward as the main channel through which intervention should work. Other characteristics found in the survey was that central banks choose large size interventions and stress on international communication and concerted interventions as means of ensuring effectiveness. Second, they prefer domestic banks as counterparts to help maximize their announcement efforts. Third, most central banks do not use secret interventions.
Actions : I exited my short USD/CHF position, helping the portfolio to recover its performance
US Dollar Barometer stands at +1.5
Trade Recommendation : Long USD / CHF
Bottomline : I think equities are set for a near term bounce. Commodities are also taking a pause from their decline. Market might trend range bound. Signs of fatigue is appearing.
Christelle Lecourt and Helene Raymond in Central Bank Interventions in Industrialized countries : A characterization based on survey results, 2006 did an interesting work on central bank interventions
Central Bank Interventions (CBI) seem to have negative effectiveness from empirical research. The main findings are that FX volatility have increased rather than been reduced, where the FX interventions frequently move in the wrong direction. Interventions done in coordination with other central banks have a larger impact than unilateral interventions conducted by a single bank. Several studies have also shown that the Central Bank statements - accompanied or not by actual interventions - can have a stabilizing effect on the exchange rate.
In theory, there are 3 channels through which interventions can act on the exchange rate : the monetary channel, the portfolio-adjustment channel and the signalling channel
1. The monetary channel involves non-sterilized of foreign exchange interventions, which is basically involving the changing the foreign exchange policy which leads to a change in the monetary policy and a change in the monetary base
2. The portfolio balance channel predicts that selling foreign foreign currency reserves will appreciate the domestic currency, whereas increasing reserves should depreciate the domestic currrency. Obstfeld (1982) has shown that however that in a Ricardian world, sterilized interventions can be ineffective even in the short term : it does not change the net wealth level of the private sector, nor its perceived composition. Empirical studies find no evidence that interventions alters exchange rate levels through a portfolio-balance channel - the main reason is that intervention amounts, although appear paramount are rather small when compared to the total daily activity in the foreign exchange market.
3. According to the signalling theory, central bank's interventions can recover some efficiency through the signal they convey on future policy. In the signalling theory, exchange rate levels are likely to be disturbed in the short term only if the information received by traders is strictly non-anticipated. When a central bank intervenes in the FX market, it conveys a signal, which indicates for instance a change in future monetary policy. If this signal is expected by the market, the information given by the signal is already incorporated in the previous day's spot quote. By contrast, if the signal is "new", it will immediately change the current FX value.
According to the authors, through their survey of central banks, the signalling effect is clearly put forward as the main channel through which intervention should work. Other characteristics found in the survey was that central banks choose large size interventions and stress on international communication and concerted interventions as means of ensuring effectiveness. Second, they prefer domestic banks as counterparts to help maximize their announcement efforts. Third, most central banks do not use secret interventions.
Thursday, September 11, 2008
Portfolio Performance : -4.73%US Dollar Barometer stands at 0
Trade Recommendation : Long GBP/USD
Bottomline : I am still short on USD/CHF, even though the portfolio is bleeding heavily. It is quite likely that the trade might wipe out the entire equity, but I am keeping my fingers crossed. A revenge trade? I guess it is, if this does not work out, I might might to raise more capital
Gold had a big move today. Commodities and equities still under pressure. The bond market is still the place to be.
Chun I Lee, Ike Mathur and Kimberly C Gleason in "The Tick/Volatility Ration as a Determinant of the Compass Ross Pattern"
According to the study, there is evidence that the compass ross pattern is absent in the spot and futures forex markets but present in the intraday returns, especially so for the holding periods of less than an hour. A Monte Carlo investigation of the tick/volatility ratio provides evidence that the pattern appears only if the tick/volatility ratio is above some threshold value. The fact that the daily patterns do not exhibit this pattern is because the ratio is smaller than the threshold value.
In other words, to have a high tick/volatility ratio, we must have either a big spike in prices or a sharp drop in volatility. Once this happens, the paper suggests that the price actions in forex move almost completely randomly in the longer time charts but more predictable in the shorter term charts (i.e. less than an hour)
The picture of the compasss rose pattern is shown above
Wednesday, September 10, 2008
Portfolio Performance : +20.95%
US Dollar Barometer : -2
Trade Recommendation : Short USD/CHF
Bottomline : Equities continue to struggle with momentum, Commodities might take a short term trend higher from here. Bond Rally might take a breather. Greenspan raised an interesting point yesterday on TV, he said that the fact that we have two US government sponsered enterprises functioning as public companies is a failure itself. He is right, the administration who came up with the idea of GSEs as listed companies failed to consider the extreme consequence of a company failure and its impact on shareholders. We can draw an analogy to Temasek owning stakes in listed companies on the Singapore exchange. As we know, Temasek has bought into a number of companies, even foreign banks that operate in Singapore. It is a well known fact that, on the basis that Temasek owns a portion of the company, the likelihood of the company failing in future is not probable unless Temasek runs out of capital (because Temasek will defend her investments). This is the "Temasek" premium built into the share prices of companies listed on SGX. The US Government, on the other hand, not until recently does not own stakes in Fannie and Freddie. I wonder if the whole mess would have happen if the US Government became a stakeholder in the GSEs, maybe they would be alerted earlier about the situation and stepped in faster. Perhaps Temasek did the right thing after all, by buying up shares in Singapore operating financial institutions.
US Dollar Barometer : -2
Trade Recommendation : Short USD/CHF
Bottomline : Equities continue to struggle with momentum, Commodities might take a short term trend higher from here. Bond Rally might take a breather. Greenspan raised an interesting point yesterday on TV, he said that the fact that we have two US government sponsered enterprises functioning as public companies is a failure itself. He is right, the administration who came up with the idea of GSEs as listed companies failed to consider the extreme consequence of a company failure and its impact on shareholders. We can draw an analogy to Temasek owning stakes in listed companies on the Singapore exchange. As we know, Temasek has bought into a number of companies, even foreign banks that operate in Singapore. It is a well known fact that, on the basis that Temasek owns a portion of the company, the likelihood of the company failing in future is not probable unless Temasek runs out of capital (because Temasek will defend her investments). This is the "Temasek" premium built into the share prices of companies listed on SGX. The US Government, on the other hand, not until recently does not own stakes in Fannie and Freddie. I wonder if the whole mess would have happen if the US Government became a stakeholder in the GSEs, maybe they would be alerted earlier about the situation and stepped in faster. Perhaps Temasek did the right thing after all, by buying up shares in Singapore operating financial institutions.
Portfolio Performance : +20.12%
Actions : My stop loss on the Short USD/JPY was triggered again early in the week shortly after the news on the bailout of Freddie and Fannie
US dollar barometer stands at +3
Trade Recommendation for the day: Long USD / CAD
Bottomline : Equities are taking a pause to figure which direction they want to go, but I think the market has more room to trend lower than higher. The US dollar strength in the market is still there, I dont understand why this is so - afterall, the Treasury just used money to bail Freddie and Fannie but US dollar bulls still like going long on the dollar. Commodities might take a pause after falling so much, I think crude will flirt around the $100 - $107 per barrel level, I don't see any tremendous selling pressure from the energy market yet moving forward. Bonds are still the market to be in.
Actions : My stop loss on the Short USD/JPY was triggered again early in the week shortly after the news on the bailout of Freddie and Fannie
US dollar barometer stands at +3
Trade Recommendation for the day: Long USD / CAD
Bottomline : Equities are taking a pause to figure which direction they want to go, but I think the market has more room to trend lower than higher. The US dollar strength in the market is still there, I dont understand why this is so - afterall, the Treasury just used money to bail Freddie and Fannie but US dollar bulls still like going long on the dollar. Commodities might take a pause after falling so much, I think crude will flirt around the $100 - $107 per barrel level, I don't see any tremendous selling pressure from the energy market yet moving forward. Bonds are still the market to be in.
Sunday, September 07, 2008
Portfolio Performance : +25.34%
US Dollar Barometer stands at 0, down from the +2 in my last update
Trade Recommendation : Sell USD/JPY
Bottomline : The equity market is set to deteriorate further, commodities might slide a bit but not that much. I dont expect the market to falter in the beginning of the week, the weakness might start toward the middle of the week.
I would like to highlight some research on forex markets by Peiter Van Foreest, from The Forex Regime and EMU Expansion, 2003.
In that paper, Foreest found that the choice of the foreign exchange regime is not of first order importance for achieving high real (economic) growth. Empirical evidence showed that production growth was unrelated to the amount of forex volatility and choice of currency arrangement. Rather, the volatility of the currency was determined by the current and the (market's) anticipation of monetary and fiscal policy. Therefore, a flexible forex system can be very stable if the monetary and fiscal policies are coherent with the market's forex rate valuation. Conversely, a managed float or fixed forex arrangement can be quite unstable.
I beg to differ, I think a managed FX system is dependant on the country's financial system vulnerability to external shocks. I think larger countries can afford to adopt flexible target interest rate policies, while smaller countries like Singapore should continue to lean against the wind.
The other thing he said in his paper, was that the stability of the currency would happen if it was coherent with the market's forex rate valuation. I think this should be applied by central banks in their monetary policy. Perhaps one of the reasons why we had such volatile movements in currencies is because the central banks surprise us! We never expected the Fed to cut rates so aggressively, so we had such big moves in the currencies and commodity markets. I think central banks should continue to voice their expectation for interest rates continually with the markets. The financial system is deteriorating. Enough of surprises and shocks, we need something credible and steadfast to hold on for support.
US Dollar Barometer stands at 0, down from the +2 in my last update
Trade Recommendation : Sell USD/JPY
Bottomline : The equity market is set to deteriorate further, commodities might slide a bit but not that much. I dont expect the market to falter in the beginning of the week, the weakness might start toward the middle of the week.
I would like to highlight some research on forex markets by Peiter Van Foreest, from The Forex Regime and EMU Expansion, 2003.
In that paper, Foreest found that the choice of the foreign exchange regime is not of first order importance for achieving high real (economic) growth. Empirical evidence showed that production growth was unrelated to the amount of forex volatility and choice of currency arrangement. Rather, the volatility of the currency was determined by the current and the (market's) anticipation of monetary and fiscal policy. Therefore, a flexible forex system can be very stable if the monetary and fiscal policies are coherent with the market's forex rate valuation. Conversely, a managed float or fixed forex arrangement can be quite unstable.
I beg to differ, I think a managed FX system is dependant on the country's financial system vulnerability to external shocks. I think larger countries can afford to adopt flexible target interest rate policies, while smaller countries like Singapore should continue to lean against the wind.
The other thing he said in his paper, was that the stability of the currency would happen if it was coherent with the market's forex rate valuation. I think this should be applied by central banks in their monetary policy. Perhaps one of the reasons why we had such volatile movements in currencies is because the central banks surprise us! We never expected the Fed to cut rates so aggressively, so we had such big moves in the currencies and commodity markets. I think central banks should continue to voice their expectation for interest rates continually with the markets. The financial system is deteriorating. Enough of surprises and shocks, we need something credible and steadfast to hold on for support.
Friday, September 05, 2008
Portfolio Performance : +25.36%
Actions: The USD/CHF had reversed course to trigger my stop loss, causing a dent in performance
Recommendation for the day : Sell AUD/USD
US Dollar barometer : +2
Bottomline : The US dollar strength is still in the market, but the weakness in equities might still linger, the bond market is having a great time, commodities still look weak to me. I think we can short gold on the rallies moving forward
Actions: The USD/CHF had reversed course to trigger my stop loss, causing a dent in performance
Recommendation for the day : Sell AUD/USD
US Dollar barometer : +2
Bottomline : The US dollar strength is still in the market, but the weakness in equities might still linger, the bond market is having a great time, commodities still look weak to me. I think we can short gold on the rallies moving forward
Thursday, September 04, 2008
Portfolio Performance : +31.17%
US dollar barometer stands at -0.5
Trade Recommendation for today : Short USD/CHF
Bottomline : I missed the big move on the AUD/USD pair as I was busy with personal matters. Moving forward, I might blog less as I wish to focus on my other personal goals. Overall, I think the equity market movement might trend lower, I think the bubble for crude is only starting to burst. The bond market is having and will have a strong rally in my opinion.
US dollar barometer stands at -0.5
Trade Recommendation for today : Short USD/CHF
Bottomline : I missed the big move on the AUD/USD pair as I was busy with personal matters. Moving forward, I might blog less as I wish to focus on my other personal goals. Overall, I think the equity market movement might trend lower, I think the bubble for crude is only starting to burst. The bond market is having and will have a strong rally in my opinion.
Subscribe to:
Posts (Atom)