Trading in the first week of the year

After all the Christmas and New Year festivities were over, financial business went back into full swing. The first week of 2008 was not pleasant for currencies, and most other markets for that matter, with Japanese Yen-related currency pairs ("crosses") trading sharply lower on heightened risk aversion in the face of data suggesting the US may slip into recession. The US Fed is usually very sensitive to a sharp rise in unemployment. Friday’s data showed such a rise and makes it almost certain that the Fed is now going to need to cut rates by ½%, and the suddenness of the deterioration in the outlook for the US suggests it may even come before the scheduled January 30 Federal Open Market Committee meeting.

What has that meant for me? Well, I decided to stay away from Euro:US dollar, which could have been very profitable as it turned out, moving from around 1.44 to 1.48, but as I have said, you have to make some decisions and stick with them. It is hard to concentrate on more than two or three deals at a time. I also decided to play with Pound sterling only a little: its volatility is great when you are on the right side but yesterday was a good example of how it shreds the nerves as it traded from around 1.968 to over 1.98 and then settled at 1.97 for the close. The Canadian dollar could not figure out what it wanted to do and seemed unmoved when oil and gold prices soared, then fell back against the US dollar after the much worse than expected Ivey report on Friday, and is now back about parity.

I concentrated on the US dollar:Yen pair [USD/JPY] (see chart) and it has fallen nicely, as expected, from around 112.50 to 108.50; I added some risk by trading Sterling:Dollar and Sterling:Yen, but I am not so comfortable with the cross-pairs. However, the two Yen pairs moved in more or less the same fashion. Waiting out some of the trades does get hairy as the losing positions sometime get very large before they turn around, but that is the nature of trading. For me, the bottom line is that I was up over 40% on the week. I did not get the maximum out of each downward movement, but sometimes had to nibble back into the bounce and get another chance. I also took a chance at playing with the small ripples (when the rate moves up and down by say 15 points). The sharp fall in the Yen to start the year may be alarming to the Japanese Ministry of Finance (MOF); we have already seen signs of semi-official buying interest in USD/JPY and Euro/JPY toward the lows seen on Friday.

I know that my bubble may burst soon and that may occur this week if I stay with the Yen and misjudge the official reactions. But I will try to remain prudent. At least my basic principle of trying to keep the gains coming and lessen the losses is working out. I still get nervous letting my deals go to maturity but I will be honest when I say that many times I also see that my early exit turns out to be a good decision. Hindsight is 20:20 so I can't undo what I did and remain content.

Here's to a restful weekend.