I am a part of the team which is responsible for management and hedging of commodities exposures. Some say corporates are good only in following advice from banks or brokerages. I do agree corporates do not have market insight of a bank. But here is a problem. It is not bank or broker or a hedge fund that has biggest risk that markets will go against them. These guys always have an option to do nothing and wait for a better trading opportunity where as we don't. We have to continue to purchase commodities, spend currencies for daily business. Such company is always exposed to changes to market price even if it decides not to hedge. In fact my company has probably one of the biggest short commodities portfolio in the world. Managing such risk effectively is a challenge. It is like being between a rock and a hard place. You get your behind kicked all the time be senior management, whether it was a missed opportunity to hedge or hedge that turned to be out of the money. Critics will say if you lost money on your hedge then you probably bought it cheaper on physical market. let's face it, nobody wants to loose money, full-stop.

So I do not have an option to do nothing as I am always in the position (short in this case). I think people like me have higher motivation to earn positive return on their portfolio then other players. In fact my intention is to bring hedging to a performance benchmark of proprietary trading.

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Thursday, July 15, 2010

Something's gotta give

I have called on possible recovery rally in risk assets two weeks ago as price action in FX markets showed divergence from regular risk on/risk off relationship. Reassessing the markets now and talking to other market participants the risk relationship looks more and more confusing as dollar falls along with falling equity and commodity prices. I will stick to the idea that this divergence is temporarily unless market starts talking deflation louder in the coming weeks (see my post in the beginning of July on this).

Here is what I am looking at:

1. Earnings season has been disappointing so far. see all my posts titled "A different approach - what could earnings season bring us?"
2. I see lower highs in commodities with momentum turning lower as well. Other technical formations support further downside. Oil is a good example:




Copper  as well:

3. Rebound in JPY was shortlived as well and further downside is likely:
4. The star of the pack is Euro:

Given the above I do not believe strength in Euro will persist and I think it will soon join the rest of the pack, probably around these levels or close to 100d moving average and slightly short of H&S target. Watch Euro carefully as if it rolls over taking into account that other markets are vulnerable to downside then things can get nasty.

What can make me change my mind? Only if I see multiple break outs above recent highs. Nevertheless risk/reward is more beneficial for risk off trades... happy trading!
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