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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Tuesday, May 18, 2010

2010 05 18 - Going technical

Preparing all the technical charts for this blog appears to be a little bit more difficult then I thought. But here we go...

I discussed previously relationship between dollar and other asset classes. once dollar goes up then everything falls. And the following bothers me a lot... I think we're at the inflection point. Below is the monthly chart of dollar index (trade weighted basket):



I don’t have much historical data, but on two occasions when index broke 200 month moving average it resulted in significant dollar rallies. Rally of 2008 is insignificant to rallies that started in April 1981 and January 1997 and lasted for several years. In the past strong dollar meant higher equity markets. But relationship reversed in the end of 2002 and beginning of 2003.

Put everything aside 200 month average is a good long term support / resistance for dollar index. If we break it upwards, there is a chance we might enter multi year dollar bull market. I am not sure what are the consequences for commodities and equities. Any opinions?

There is more technical analysis to come this week.
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