Forex Hedging Notes July 2015

This is a forex exercise I do to measure my hedges and make sure my hedges are strategic based on reasonable expectations and management.

I was taking screenshots as well but somehow I lost the file when it was on my clipboard, a very good way to track where my trades have been, why I have been constantly jacked by the circumstances of having not predicted.

This latest movement with the GBPAUD totally caught me off guard having jumped 8-9c – another 4%+ in the last few weeks, just after I had started piling on the counter trend, expecting it to reverse. There was no indication that now was the time for GBP strength and Aussie weakness but now I see that the USD has stalled – it had already been in motion for months, and the pound moved to pole position for a short stint, right when the AUD was still absorbing the shock of bad news.

The euro is in bigger trouble than the AUD, but the euro is further down it’s path. Neither have found their bottom. euro is finding it’s way, aud just had a decent plummet. NZD had a plummet, another blow to me, but as it turns out nowhere near as bad as the GBPAUD.

I can’t help but think that now that I am back in a recovery phase, it’s like the last set of nightmares have been like wearing in a pair of shoes. It hurt, but they slip on nicely now.

Every time it gets harder to bring me down. I really don’t think I’ll see 6 again. More even hedges mean more security. More equity means more margin to throw down to make sure we don’t get near the edge.

My feeling now is if we can get to $20k equity and we are rocking q $4k margin, sure, things might get woolly at various stages but we would gain accelerating returns after a few months.

RIght now I want to confront two situations – the situation where we pull up and the situation where we walk the line.

Walking the line would be euro rising and aud falling which is a realisitic scenario. We would have to hedge. But our preferred strategy would be to pull out of any euro hedges as they started to top out, preferring to shovel our commitment onto the USDAUD to combat AUD weakness against the euro.

Buying euros would be a hedging strategy based on the withdrawal method. There is plenty to clear out of my EURUSD side but I must pick my top and I honestly believe 1.15 is impenetrable. If I’m wrong it will be credit card time. We’ve always know this though.

This would create a situation where I was forced to buy big euro positions above 1.13 with the hope of throwing them out before we reverse again. In any case it would be larger US positions going in at the top, that is we should ride in conservatively to EURUSD or EURAUD. EURGBP will fall anyway, but will also be another excellent one to invest in the other side at the top. This means taking a lot of damage, and the credit card coming out before we even think about major hedging moves.

The risk is of course we don’t protect ourselves, and after the initial move up toward 1.15 that returns us to $120k euro, it moves up again and we will have been truly savaged again for grands. A grim scenario.

My belief is after this little jump up of a couple of cents for a week or two will then be followed by the big resumption – people will know whats happening with greece and they will look towards the next determinant and thats when it will be more bad news and the euro will start selling and I will ride it down, probably particularly on the GBPEUR because ive already got too much USDEUR and I don’t want t o get caught on yet another false break out. AUDEUR is too weakany euro strength will always hit the AUD hardest because it’s weakest. The strategy is too hold as few euros as possible so we can at least reduce our long term carry costs and experiment with the technique of waiting for a currency to swing to it lowest and then start buying up madly knowing that the historical upswing can’t be too far away.

The GBPAUD is so hard. The pound is strong but where is it’s limit? We have to play the same strategy because of the historic high. If the monetary policy both point opposite directions we can’t assume it won’t continue to move up. However this looks like a prime candidate for hedge problems like we’ve seen with USDEUR.

By the time it returns to 1.02, we will be carrying a massive hedge, with awful carry terms. This is why we must continue to buy USDAUD and EURAUD at the topside rather than buy GBPAUD

How does it work if we pull up? The euro weakens against all currencies and I buy pounds while i let the aud and the usd gently wind down.

My estimation that a 1% move on the AUDEUR would give me about a $600 equity boost. A move on the USDEUR from 1.114 to 1.092 – which is only the bottom of it’s most recent range, would free me up about $1600. Take me to 1.07 and across both of those, I’ve just reset my equity to $13k. Just at 1.07. The pound being still a little overbought will be forced under the USD seeing them finally return to $5k debt a piece, winding off another $1300 worth of equity, similarly, seeing GBPAUD drop 2% to 2.042 would also allow a good $1100 to slip out.

Piling onto GBPEUR to ride pound strength mainly because we have room in that hedge that we don’t on the US side, whereas the AUD is too soft to back for euro weakness.

AUD we will have to wait for signs of life, to me, the AUD must return above .75 before it heads below .72 – our fear must be that it could again do exactly what the

With USD we can expect more tops, but with GBP we never know if we’re topping or not. With the GBP we must stay neutral. We must assume it will beat on both the AUD and EUR until it doesn’t, at which point we are walking away with some hedge marks.

But what happens is the money thrown in on the other side is nothing. It’s the unwinding of the hedge that suddenly begins to give you all your equity back.

But we have to be realistic about how it doesn’t work out. The AUD can drop further but it does look like it needs a little rest and that’s what we need it to do. The instructions for USD and GBP must be to reload the gun. At least we have that strategy available. We have to be careful if the euro rises because if it then goes to parity and we’ve built a reckless hedge we will either hurt, or be forced to ride a $300k+ hedge down.

So basically the worst case scenario is that the euro goes to 116 and I havent built a proper hedge and I get smacked down

If at 1.13 we put in a $50k trade that we give a $100 stop to, if it rises to 1.14 or 1.15 we could make $400+ just by moving the stop up. This is my last resort when hedging fails. Old fashioned trading, stops and targets. If we hit the stop, at least it saves my equity by $1k.

I think we need to seriously think about this in the USDAUD, and GBPAUD, maybe even the EURAUD if it becomes obvious that the aud is staying weak and the euro is raging strong, it’s all about where we get caught.

Think about how we can see technicial levels developing. Just recently I noticed ranges especially with the USDEUR being so trapped, the levels to buy at were obvious.

73 EUR/USD 159 vs 236 – here you can see already we are forced to hedge to heed off uncertainty. When you reach a risky equity level, you must protect it. This is the one wheer we see big slabs rolling. Until we get to 1.05, then we have to decide where we go with it.

58 AUD/GBP: 102 vs 44 – the GBP could run further but we are betting on this to not run too much further as it seems it’s already played out a 4% move to very high in it’s range. Over time the Aud will catch up with the GBP, but short term, we have to be prepared and the big hedge is a testament to how bad things got.

55 AUD/EUR: 90 vs 35 – Even though the aussie is week, we are positioning this for euro losses as we empty out the bad side of the carry on this and leave it as a place where we can profit from the euro falling even though it won’t likely fall too much.

51 EUR/GBP: 110 vs 59 – leave room for the euro jump, then stack it in for the dip buy.

50 AUD/USD:106 vs 56 — again we are balancing the knowledge that this will continue to head down with our need to wind the equity back by being as unexposed as possible when that windback comes. So far, I have done well on the windback, but have been to slow to wind up when the roll came through. We will push this harder than otherwise because we have nothing else to defend against aussie weakness versus the gbp or euro, so we have to make our gains here, maybe leave some more behind, but hedge ourselves against further aussie losses. The big hedge remains justified but we want to basically not see 75 before -$2000.

36 GBP/USD: 99 vs 135 – This is a critical pair because when the US begins rising, we want to see gains, we want to see our unhedged gaps tip back. this is one we’re waiting for, but it is also tipped to really drop long term, so there will be times where the US will go back to how we’ve seen it, huge hedging moves.

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