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, September 14, 2010

Do not underestimate weak dollar PART1

This title of this post is taken from my post written roughly two weeks ago. What has started as some stability in dollar ended up with the major rally in equities and commodities. thus do not underestimate weak dollar.

I was quiet for the last couple of days for one simple reason, there was nothing to write about and there was nothing to change my view since last two weeks ago, which was weak dollar, stronger commodities and equities. it is time to revisit this statement for two reasons: I start loosing faith in risk on risk off trade and we're approaching some key levels...

Well, intra-day correlations still hold and are quite high. My problem is the following. I never looked at another safe heaven asset which is bonds.  The relationship of bonds with other risk assets is pretty much straight forward under "normal" risk conditions, bond prices have negative correlation with equities and positive correlation with dollar. during risk off trade everyone rush from equities into safe heaven bonds in the US forcing prices to rise and yields to fall. And today something strange is happening as dollar falls, equities rally and so do bonds! now one day of trading does not make a new trend but feels like something is going on. After asking around for opinions I tend to agree with the following... There is currently rebalancing taking place as big players are running away from the US and rush into emerging markets. you can see which market by strength of respective currencies vs dollar. Feels like people are throwing in a towel regarding the US. So while on top this looks like a regular risk on trade, digging further down makes me nervous. Again, the trend for risk assets has not changed for the moment, but I would carefully look at investors appetite for US bonds and especially at treasury auctions. There is may be another crisis coming, which US debt... time will tell...

Charts still suggest that bounce from end of August lows remains intact however we equities are approaching ranges high. it is 1177 level to watch for S&P for potential top, but I would guess that given the strength of commodities complex and weakness in USD we will overshoot this target, if conditions stay normal:



Dollar weakness is off particular significance as we broke through 200d moving average, so further losses in the short term are likely:




Again, I just hope that recent dollar weakness is coming in from risk on trade rather then something bigger. Oil remains strong and copper is within recent ranges -  nothing new, so I will not put their charts .

I gave up some time ago on any upside potential for NYMEX gas. Revisiting the charts still does not show any bullish signs and recent rally off $3.6 looks to be corrective, but bollinger bands offer at least some stability:


Out of time... will try to look more into debt markets this week...
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