Here’s the second look back at the tights I gave for 2014
Here’s the post from late last year Littlestone’s Big 4 for ’14 – #2 Walking in a Yellen wonderland
The US was still looking to cement a recovery going into 2014 and while the jobs picture was all fine and dandy there were still parts of the economy that were still not firing on all cylinders.
Housing was one area that needed monitoring as it was slipping into the year end. It had it’s ups and downs during the year and is finishing 2014 quite strongly. It’s still maybe behind the curve somewhat, given the jobs gains, but that is also reflective of the low wage growth we’ve seen. Obamacare was a big barrier for firms to commit to longer working hours and contracts and that kept pay lower and was be a big reason why people didn’t commit to home purchases.
Inflation was a worry for 2014 and what the Fed would do if it fell lower as the economy recovered.
“The inflation outlook is looking lower and if we see it falling in early 2014 then the Fed could be in a pickle as a strengthening economy should bring inflationary pressure. If it doesn’t then we could have a fight between the Fed meeting their unemployment threshold while missing their 2% inflation target. That’s likely to throw forward guidance right into the spotlight and raise all sorts of questions about what the Fed will do.”
Inflation did pretty well in the first half of 2014 and held up well until the these last couple of months. As we’ve seen the market has decided that the lower inflation will hold back the Fed from raising and forward guidance has evolved once again into looking for certain words and phrases and how dots change on a matrix. What a crazy ass market we trade eh?
Manufacturing is the other big sector that gets its end of year report card marked with “could do better”. Exports have been slipping and while employment was doing well the orders out of the gates haven’t taken off yet. Much like the UK the US needs to see trade pick up globally to keep the recovery ship steady and afloat.
Janet Yellen became the most boring central banker in the world. On one hand that’s not a bad thing. There’s no off the cuff hints, bombshells or cryptic messages at non-Fed events and pretty much the same old script at Fed events. This tends to leave the market a little frustrated when it’s not been thrown a bone but Yellen isn’t here to give us lot little treats. On the other hand, covering her appearances is rather painful from this side of the fence.
Janet Yellen was more bottle rocket than napalm at Fed events
After the first couple of months the dollar was a bore fest until the Autumn but it retained a very strong bid tone overall, and if it was going to make a big move it was always going to be up.
“Against the Yen it’s a 2 vs 1 trade in favour of up. If Japan recovers and meets its targets then the pair goes up further. If the US recovers it goes up anyway so my view is to still play from the long side over the year. Big dips in the pair will see me getting long. Against other currencies
As I type we’re trading into 120 and +15.71% since Jan 1st. The low to high has been 2109 pips
USDJPY 2014
Holding longs was a test of patience through most of the year as the pair refused to break but the rewards came eventually when we ran to 110. The bigger shock, even to a USD bull like me was the next run to 120.
And what of the euro?
“I don’t think the picture is altogether clear. Will we see EUR/USD at 1.25 or less, or cable at sub 1.50?”
“If the European economy doesn’t perform next year then there’s a case to say yes. However, given that the risk of a EU meltdown is off the cards there’s still value in Europe, for example, bond yields at 4+ % (10 yrs) for countries like Spain and Italy still mark decent returns. Such yields won’t be sniffed at by investors in a stabilising global picture and so a steady stream into the euro is likely to continue.”
“While a European recovery may be a longer drawn out affair it will turn around at some point and if we hit 1.25 (or less) then I’ll be looking to take advantage by building a long term long trade.”
Well, on that last comment we know we’re still waiting for a recovery to happen. It’s also why we don’t make bold predictions about what will happen in the future. We look at the possibilities and then we’re ready to trade the potential outcomes.
For me there was one single defining moment and that was Mr Draghi dropping the hint that the ECB were ready to cut rates again.
I’ve had more than a few call me out on my long EUR/USD trade at the time, even yesterday when someone called the trade a “terrible terrible mistake.” In the moments leading up to that Draghi line the trade wasn’t bad at all. I was long an average of 1.3708 as it traded just shy of 1.40. Old Teflon was at its best. What happened from then on shows that sometimes all the tech and fundamentals in the world count for nothing if someone opens their trap and says a few words. If Draghi had said nothing 1.40 would have blown and who knows where it would have gone. There was only one reason why I lost money on that trade and that was pure stubbornness to accept what was happening. I became the proverbial deer in the headlights. If a marching band had come down the middle of my road with big banners saying “GET OUT” I would have ignored it. My judgement was sound leading up to that moment and I refused to believe I was wrong. There were some decent long term tech levels between 1.35 and 1.33 and I let the trade run down there before finally taking my medicine and being stopped out at my planned level just under 1.33.
That was my worst trade of the year, not on a monetary basis as my stop was in place from the start and therefore I knew my risk, it was the worst because I had ample time to get out (and in a profit) but didn’t. Sometimes even people with bags of experience in trading need to get a kick in the nuts now and again and that was mine.
Right now that stop point looks to be the best part of that trade as we trade 1100 pips lower. The euro looks to go out on the lows of the year and is already looking to set the scene for the next one.
