We have been focusing on the equity markets quite a lot recently, due to a huge pick up in volatility. Let us now refocus our attention on currencies, as I discuss my own positioning as well as my views on future price action.
Chart 1: Majority of hedge funds are sitting pretty in the USD right now!
One could argue that majority of the current volatility could be attributed to Federal Reserves plan to end the QE program. As we have all heard in recent months, there is even talk about attempting to hike interest rates sometime in 2015. US Dollar has benefited from these policy changes against all the majors (and majority of the minors too), however this is now a very overcrowded trade.
That doesn’t mean the greenback won’t rise even further, but what it does mean is that majority of the easy gains have already occurred for now. We have a major resistance sitting right above at around 88 on the USD Index. If and when reached in coming weeks, I would assume the Dollar to finally take a breather for awhile.
There is a lot of excess cash in my fund right now, as I haven’t purchased any precious metals in a long awhile and all of it sits in US Dollars. I am also long the US Dollar by being short the Aussie (more on that later down).
Chart 2: Last weeks Yen rally & stock sell off squeezed half of the bears
Japanese Yen managed to rally during stock market volatility, as it once again benefited from the appeal of being a safe haven asset. I purchased the Yen above 109 against the US Dollar, as it became oversold in early October. As we can clearly see from the chart above, short bets reached close to $14 billion, which is one of the more extreme positions in history.
I was planning to hold this position for awhile, with the hope of a major short squeeze running its course. However, as the stock market corrected rather violently and VIX spiked swiftly, I was forced to close my Yen long last Wednesday just below 106 per US Dollar. Quite a profitable short term trade, however it wasn’t what I was after.
Looking at the COT futures positioning right now, I can see that positioning has been cut by almost a half in just one week, so there is a possibility for the Yen to keep declining. Right now, I am neither a buyer nor a seller of this currency. Having said that, if the Yen was to fall again, I would definitely have another crack at it. Such an overcrowded trade cannot last forever and eventually consensus will be squeezed.
Chart 3: Consensus has now positioned for even further Aussie declines
Regular readers of the blog would know that I have been short the Aussie Dollar since late 2012 around 1.05 per USD. I also added to that position with another large short bet in August of this year at around 0.94 per USD. I continue to hold both positions with a view that Aussie could still decline some more from the current support level of 0.8650 per USD.
Having said that, it seems that the market now agrees with me and my thought pattern has become consensus. That usually means one of two things. Either the decline in the Aussie will be more gradual and choppy from here onwards, with continual short squeezes. Or, the currency will now have a sustained relief rally from the current support level and all of us will be wrong for awhile. In other words, easy gains have been made and it will be a lot harder to short the Aussie from here.
Chart 4: Managers increasing bets on Gold but the price looks bearish!
Finally, we turn out attention to the precious metals sector. I believe that the long term secular bull market in this sector is not yet finished, especially the way central banks continue to act with currency devaluations. However, we need to respect the price action right now, which shows that we are currently in a cyclical bear market that was way overdue after Gold recorded 11 annual gains in the row.
In my view, as I have written many times on the blog, Gold will be breaking down into a final low soon enough. The up-and-coming selling pressure will most likely produce a proper panic which we failed to see in middle of 2013. The shake out should get rid of majority of perma-bulls, which refuse to give up on their optimistic Gold views. This is precisely why I have fully hedged my Silver holdings in early July (above $21), as well as executed short positions on Gold (above $1310).
While Silver has recently broken below its important support level at $19, Gold continues to hang in there (for now). However, I think this is soon about to change and Gold will follow Silver downward by breaking below $1,185. Hedge funds have recently been adding to Gold once again, but the price pattern remains quite bearish in my opinion.
Chart 5: Positioning in the Silver market is now becoming very negative