Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: Market participants are going to want to keep an eye on FX rolls this month, with traditional liquidity needs for year end will start coming into play. Overlay Capital publish daily yields that are derived from these FX swaps. Domestic money markets inside the freely tradable countries have utilized the currency swap market for decades to raise or get rid of balances.

China could take center stage this year with yields inside the country expected to tighten into year end. Below you can see the 10 day average yield is 2.1%, but underlying inflation pressures, profit taking from Chinese investment and a need to maintain a tax on capital outflow, will provide at times surges in the short date interest rates. The impact on the currency could get interesting as reaction in yield may give the CNH a boost, but an already strong currency is expected to find sellers on any rally.

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.619 11.412
Mexico - MXNUSD 7.240 7.656
Russia - RUBUSD 7.132 6.880
South Africa - ZARUSD 6.442 6.709
Romania - RONUSD 2.357 2.575
New Zealand - NZDUSD 1.634 1.846
China - CNHUSD 1.214 2.100
Poland - PLNUSD 1.170 1.151
USA - USD 1.160 1.151
Australia - AUDUSD 1.066 1.404
Thailand Baht - THBUSD 1.050 -4.357
Canada - CADUSD 0.706 0.716
Singapore - SGDUSD 0.626 0.396
Norway - NOKUSD 0.350 0.303
United Kingdom - GBPUSD 0.278 0.292
Hong Kong Dollar - HKDUSD 0.091 0.436
Hungary - HUFUSD 0.003 -0.025
Israel - ILSUSD -0.128 -0.002
Japan - JPYUSD -0.147 -0.160
Euro Member Countries - EURUSD -0.631 -0.671
Sweden - SEKUSD -0.662 -0.778
Denmark - DKKUSD -0.808 -0.801
Switzerland - CHFUSD -1.001 -1.053
Czech Republic - CZKUSD -1.176 -1.725

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Bitcoin Futures and the Road Ahead

Topic: Business Commentary

Watching the price activity of Bitcoin, generates a tremendous amount of excitement and discussion. I have no view on the current value/price level, but do find the volatility of the instrument be worth keeping an eye on. The Cboe is aggressively marketing the launch of Bitcoin Futures as they patiently wait for final CFTC approval for this new futures instrument.

Cboe's push makes sense, given the fact that cost in trading cryptos on existing exchanges/platforms, is very expensive. Round-trip trades can cost 30-40 bps! This is getting cheaper, but will still be a lucrative revenue stream for Cboe, with comfort in its centrally cleared platform for settlement purposes. Comfort with counterparty risk, and the confidence that you will get your margin/investment back. The current state of platforms where cryptos trade have some uncertainty on moving money out.

The excitement and positive story coming out of the market is driven by statements like "volatility creates opportunities for investors to wager on or hedge price moves, and it drives trading volumes that fuel exchange profits". This is where I want to temper the enthusiasm for the Cboe to be the place for massive trading volumes to take advantage of this "volatility". Having grown up in the interbank currency trading business in the 80's, I saw first hand the advantages of profits off the back of volatile trading. But, the critical market player for making large money was the "Hedger" on the other side of the trade. Investors are well aware of the split between speculators (traders) and commercials (hedgers) in the Futures Marketplace, as they are required to publish the findings. I am not a proponent of this data for making buy/sell decisions, but only to remind investors that these players exist in the market. Traders trading with each other will provide profits to the smarter or faster group, but it's a zero sum game. Losers leave, and winners need new players to participate. Money is made, but transaction costs add up for both sides. Back in the 80's the IMM (old name for currency futures house - International Money Markets) would trade decent amount of volumes, but nowhere near the volume in OTC FX market. They were separated because futures were an instrument that settled in US Dollars, for the difference in the buy price and sell price. That was fine for speculators, but hedgers rarely took delivery of the underlying currency because the movement of cash was very expensive and operationally risky, along with adding banks with foreign accounts to get involved. Large corporates with international exposures would use their banking relationships to execute the FX in the OTC markets. There was a group on Funds that needed a benchmark to mark their books and the futures market provided an exchange print for them. In the mid 80's, these growing Funds pushed the futures exchange to create a mechanism to merge the FX Instruments in the OTC and Futures contracts. This was the birth of EFPs, Exchange for Physical transaction that brought the brokers on the IMM to Banks PB network for credit and clearing functions. Now Funds could use the OTC market for liquidity (and 24 hour availability), and maintain their margins with the exchange and their underlying brokers, as well as having access to the underlying currency. This was the real growth in FX, because the market understood the value in speculators getting to face off against corporate flows. These players had two different timeframes and needs. Now volatile markets actually provided opportunities for most traders to make money off the hedger/commercial flows. You're dreaming if you think traders just make money in volatile markets.

In summary, I think the actual lift in Bitcoin from the Futures market will come when the future can convert to the underlying. The core flow initially will need to come from accounts that are acting as Investors in Bitcoin, who want a safer place to hold the underlying exposure. Traders that are watching the OTC platforms, and want to arb back to the futures will have accounting issues that will not be easily settled, and will cost more than the opportunity. Cboe will need to focus on creating the complete package that includes credit, counterparty risk and delivery of the underlying asset before benefiting in a meaningful way.  

Country Yields via Short Date FX Swaps

Topic: Business Commentary

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.603 11.525
Mexico - MXNUSD 7.564 8.490
South Africa - ZARUSD 6.985 6.962
Russia - RUBUSD 6.801 6.880
China - CNHUSD 3.260 2.388
New Zealand - NZDUSD 2.036 1.910
Romania - RONUSD 1.619 1.662
Australia - AUDUSD 1.502 1.463
Poland - PLNUSD 1.190 1.342
USA - USD 1.160 1.160
Canada - CADUSD 0.864 0.800
Norway - NOKUSD 0.332 0.282
United Kingdom - GBPUSD 0.280 0.304
Hong Kong Dollar - HKDUSD 0.239 0.840
Hungary - HUFUSD 0.214 -0.091
Israel - ILSUSD 0.174 0.069
Singapore - SGDUSD -0.035 0.532
Japan - JPYUSD -0.189 -0.188
Euro Member Countries - EURUSD -0.624 -0.624
Denmark - DKKUSD -0.699 -0.736
Sweden - SEKUSD -0.749 -0.704
Czech Republic - CZKUSD -0.883 -0.852
Switzerland - CHFUSD -0.961 -1.003
Thailand Baht - THBUSD -1.583 -5.574

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment:


Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.846 11.439
Russia - RUBUSD 7.325 7.856
Mexico - MXNUSD 6.881 6.918
South Africa - ZARUSD 6.858 7.123
New Zealand - NZDUSD 1.898 1.964
Australia - AUDUSD 1.432 1.583
Poland - PLNUSD 1.289 1.213
Thailand Baht - THBUSD 1.268 1.070
USA - USD 1.160 1.160
China - CNHUSD 1.160 1.294
Canada - CADUSD 0.731 0.698
Singapore - SGDUSD 0.631 0.615
Israel - ILSUSD 0.265 0.104
Norway - NOKUSD 0.213 0.407
United Kingdom - GBPUSD 0.011 0.018
Romania - RONUSD -0.070 0.184
Hong Kong Dollar - HKDUSD -0.115 -0.030
Japan - JPYUSD -0.225 -0.370
Hungary - HUFUSD -0.236 -0.283
Euro Member Countries - EURUSD -0.634 -0.661
Denmark - DKKUSD -0.886 -0.835
Sweden - SEKUSD -0.941 -0.902
Switzerland - CHFUSD -1.077 -1.092
Czech Republic - CZKUSD -1.276 -1.012

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/08/21

Topic: Trading Notes

Portfolio Performance for 2017/08/21

Daily Positions: 12
Profitable Positions (% of total): 66.67%
Maximum Drawdown: -0.52%
Daily Net Profit: 0.03%
YTD P&L: -2.6%

Commentary: The model got new parameters from the system today and saw positions move accordingly. The leverage used is now above 2x for the first time this year. The core position is short EUR against the CAD, GBP and USD. The model has been struggling since April and we continue to methodically run the system daily, building on the data we use for the machine learning process. We will be adding additional currencies next month and will layout those plans in the coming days.

CURRENT CURRENCY EXPOSURE FORE 2017/08/22

 

TYPE MARKET UNITS
Long CAD 6,940
Long GBP 6,547
Long USD 6,169
Short EUR 9,000
Short AUD 6,148
Short CHF 1,251
Short JPY 372,081

Overlay Capital Trading Program Daily Snapshot 2017/08/14

Topic: Trading Notes

Portfolio Performance for 2017/08/14

Daily Positions: 12
Profitable Positions (% of total): 66.67%
Maximum Drawdown: -0.74%
Daily Net Profit: 0.19%
YTD P&L: -2.01%

Commentary: The model gained some ground back yesterday as the Yen finally saw some reluctant selling, mainly against the USD. The model maintained near maximum short Yen going into today's trading session, along with short CAD. The model continues to see the leverage factor at 2:1, strongest reading for the year. As you see below, the model has a long USD bias with a long Swiss position that will give support if we see the geopolitical situation heat up with respect to Nort Korea.

At Overlay Capital, we continue to run our system daily and are constantly improving the process. With interest rates churning globally, currency markets will be first movers when direction for rates are clear. We expect our model to capture those moves. 

CURRENT CURRENCY EXPOSURE FORE 2017/08/15

 

TYPE MARKET UNITS
Long CHF 2,906
Long AUD 4,478
Long GBP 3,826
Long USD 3,694
Long EUR 3,500
Short CAD 11,305
Short JPY 1,145,295

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: The relationship between AUD and NZD catch my eye today. New Zealand rates are starting to move higher, a little quicker than the Aussie rates. The cross, AUDZ/NZD had been moving higher into the 1.08/1.10 zone recently, the interest gap materialized and the cross appears to have made a turn back lower. Keep an eye on the interest rate market for future direction in this pair.

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.711 11.380
Russia - RUBUSD 7.899 8.222
South Africa - ZARUSD 7.140 7.380
Mexico - MXNUSD 6.900 6.830
New Zealand - NZDUSD 1.993 1.876
Australia - AUDUSD 1.582 1.644
Poland - PLNUSD 1.199 1.208
China - CNHUSD 1.160 1.505
USA - USD 1.160 1.160
Canada - CADUSD 0.962 0.603
Singapore - SGDUSD 0.895 0.546
Norway - NOKUSD 0.334 0.391
Romania - RONUSD 0.231 0.259
Israel - ILSUSD 0.194 -0.131
United Kingdom - GBPUSD 0.025 0.052
Hong Kong Dollar - HKDUSD 0.019 0.033
Hungary - HUFUSD -0.251 -0.331
Japan - JPYUSD -0.480 -0.364
Czech Republic - CZKUSD -0.691 -1.446
Euro Member Countries - EURUSD -0.702 -0.630
Denmark - DKKUSD -0.891 -0.787
Sweden - SEKUSD -0.935 -0.818
Switzerland - CHFUSD -1.114 -1.043
Thailand Baht - THBUSD -4.256 -1.594

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/08/11

Topic: Trading Notes

Portfolio Performance for 2017/08/11

Daily Positions: 12
Profitable Positions (% of total): 25%
Maximum Drawdown: -0.06%
Daily Net Profit: -0.06%
YTD P&L: -0.01%

Comments: The model moved back to holding a bearish JPY position at Friday's close. The model in general has hit its highest leverage point (above 2:1) this year, expressing a strong level of confidence. Given the geopolitical stress in the region (North Korea specifically) the model will need calmness to prevail. The other interesting position is in AUDCAD. This pair has been fluctuating either side of parity for a few years, so I would anticipate this position to not gain much attention.

The British Pound is long in the Portfolio, as is struggling to hold the 1.3000 level. UK economy is struggling and any news on Brexit has been met with negative market reaction. Given the weakness in the USD so far this month, cable doesn't appear to want to participate.

CURRENT CURRENCY EXPOSURE FORE 2017/08/14

 

TYPE MARKET UNITS
Long CHF 2,902
Long AUD 7,978
Long GBP 3,181
Long USD 6,129
Short EUR 200
Short CAD 11,224
Short JPY 1,145,988

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: Worth revisiting the yields for each country. A number of the developed world interest rates have bottomed out and are gradually moving higher. You will want to keep an eye on the current rate vs the 10 day average. Two that are telling an interesting story would be GBP and HKD. Both struggling to gain ground from historic lows. GBP in particular will need to see a move higher in order to justify cable moving above 1.3000 on the spot.

The Hong Kong Dollar is another country that has different forces starting to impact it's economy, expressed through the exchange rate. The HKD is fixed against the dollar and will see central bank intervention to maintain the stable cross rate. The interest rates should also move in lock step with US interest rates. That appears to be not happening this time around as HK rates are about half the US. I believe this is an interesting view into the capital flows from both China retail (that makes up about 20% of the volume) along with the institutional Chinese clients. The HK equity market was up close to 40% this year until recent profit taking has come in. These client flows when moved into HK create a short CNH/long HKD position for the investors. The recent reversal of the trend (strong CNY/weak HKD) is an added force around this profit taking. The retail flow must return to China markets because of regulations, but the larger Chinese institutions appear to be moving into Europe and US equity markets. You will want to watch the level of HKD and its interest rates via FX swaps that we at Overlay Capital calculate and publish daily. 

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.541 11.402
Russia - RUBUSD 8.192 8.280
South Africa - ZARUSD 6.966 7.367
Mexico - MXNUSD 6.756 6.831
New Zealand - NZDUSD 1.852 1.854
Australia - AUDUSD 1.632 1.652
Thailand Baht - THBUSD 1.594 -1.187
Poland - PLNUSD 1.239 1.209
USA - USD 1.160 1.151
China - CNHUSD 1.020 1.561
Canada - CADUSD 0.745 0.575
Norway - NOKUSD 0.448 0.381
Romania - RONUSD 0.420 0.273
Singapore - SGDUSD 0.368 0.507
Israel - ILSUSD 0.156 -0.175
Hong Kong Dollar - HKDUSD 0.055 0.036
United Kingdom - GBPUSD 0.051 0.052
Hungary - HUFUSD -0.210 -0.341
Japan - JPYUSD -0.465 -0.344
Euro Member Countries - EURUSD -0.619 -0.628
Czech Republic - CZKUSD -0.764 -1.525
Sweden - SEKUSD -0.801 -0.809
Denmark - DKKUSD -0.815 -0.776
Switzerland - CHFUSD -1.124 -1.038

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: As you see below, the Chinese authorities have not taken the pedal off the yield accelerator yet. USDCNH has rallied back near 6.80 level this am. China are determined to keep the currency within a relatively tight band over the summer. I expect the rates to calm down and get back below 4% next week. That will give the market a chance to look at other yields for a more sustained dividend type yield, like Turkey, Russia, South Africa and Mexico.

 

Country Yield 10 Day Average Yield
China - CNHUSD 27.470 23.363
Turkey - TRYUSD 11.780 11.691
Russia - RUBUSD 8.884 8.800
South Africa - ZARUSD 7.672 7.963
Mexico - MXNUSD 6.718 6.985
New Zealand - NZDUSD 1.609 1.676
Australia - AUDUSD 1.457 1.604
Poland - PLNUSD 1.317 1.343
USA - USD 0.910 0.910
Thailand Baht - THBUSD 0.855 1.228
Singapore - SGDUSD 0.318 0.503
Norway - NOKUSD 0.287 0.361
Canada - CADUSD 0.154 0.409
United Kingdom - GBPUSD -0.047 -0.016
Hong Kong Dollar - HKDUSD -0.072 -0.018
Romania - RONUSD -0.154 -0.096
Japan - JPYUSD -0.248 -0.284
Israel - ILSUSD -0.354 -0.175
Hungary - HUFUSD -0.393 -0.312
Euro Member Countries - EURUSD -0.755 -0.762
Denmark - DKKUSD -0.907 -0.917
Sweden - SEKUSD -0.914 -0.801
Switzerland - CHFUSD -1.154 -1.149
Czech Republic - CZKUSD -1.521 -1.265

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: China authorities went with another aggressive move against speculators who have stayed with a short CNH trade. As highligthed here after the moody's downgrade, we saw spot move above 6.89 and the yields via FX rates jump giving clients the opportunity to "load up" on CNH (May 24th). I thought the move would be contained below 6.8000. What I wasn't anticipating was that the Central Bank would jack rates from 3.5/4% to >40%! (check May 30th blog). This aggressive move was designed to wipe out gains that short CNH holders have been sitting on. If these spec funds failed to roll their trades out, they may have been crushed on both spot move, plus funding costs.

Watch the daily country yields we produce via the FX swap market for clues in CNH going forward.

 

Country Yield 10 Day Average Yield
China - CNHUSD 38.001 20.833
Turkey - TRYUSD 11.582 11.644
Russia - RUBUSD 8.981 8.702
South Africa - ZARUSD 8.020 7.943
Mexico - MXNUSD 6.498 6.988
New Zealand - NZDUSD 1.672 1.684
Australia - AUDUSD 1.587 1.622
Poland - PLNUSD 1.460 1.357
Thailand Baht - THBUSD 1.122 1.286
USA - USD 0.910 0.910
Singapore - SGDUSD 0.426 0.510
Canada - CADUSD 0.401 0.427
Norway - NOKUSD 0.344 0.372
Hong Kong Dollar - HKDUSD 0.059 -0.017
United Kingdom - GBPUSD -0.019 -0.014
Romania - RONUSD -0.066 -0.090
Japan - JPYUSD -0.355 -0.293
Israel - ILSUSD -0.440 -0.203
Hungary - HUFUSD -0.528 -0.304
Euro Member Countries - EURUSD -0.788 -0.757
Sweden - SEKUSD -0.951 -0.780
Denmark - DKKUSD -0.951 -0.911
Switzerland - CHFUSD -1.194 -1.142
Czech Republic - CZKUSD -1.221 -1.213

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/05/30

Topic: Trading Notes

Portfolio Performance for 2017/05/30

Daily Positions: 12
Profitable Positions (% of total): 41.67%
Maximum Drawdown: -0.52%
Daily Net Profit: -0.2%
YTD P&L: 2.24%

Comments: Going into month-end today, the model continues to add to long GBP position. Election news showing the Tory party losing a grip on victory next week is the latest news to hit the currency. FX swaps indicate the GBP is in negative territory, which is also adding to the downward pressure on the currency. Watch the 11am (ET)/4pm (London) activity in GBP and related crosses today. The model appears to be betting on a GBP reversal. The long Aussie position is interesting, as the currency has been quiet for the year to date. I suggest you watch activity around London close for short term direction.

CURRENT CURRENCY EXPOSURE FORE 2017/05/31

 

TYPE MARKET UNITS
Long JPY 39,940
Long AUD 5,193
Long GBP 4,243
Short EUR 3,100
Short USD 3,692
Short CAD 179
Short CHF 2,340

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: Massive squeeze under way in China again. As described last week with buy CNH recommendation, get ready to take your profits below 6.8000.

GBP drops into negative territory as election polls start to show Tory party lead dissolving. GBP remains under pressure. 

 

Country Yield 10 Day Average Yield
China - CNHUSD 43.020 17.202
Turkey - TRYUSD 11.870 11.617
Russia - RUBUSD 8.794 8.648
South Africa - ZARUSD 8.356 7.902
Mexico - MXNUSD 6.678 7.004
New Zealand - NZDUSD 1.675 1.696
Australia - AUDUSD 1.546 1.637
Thailand Baht - THBUSD 1.331 1.369
Poland - PLNUSD 0.919 1.354
USA - USD 0.910 0.910
Israel - ILSUSD 0.910 -0.222
Canada - CADUSD 0.455 0.418
Singapore - SGDUSD 0.315 0.546
Norway - NOKUSD 0.184 0.377
Hong Kong Dollar - HKDUSD 0.050 -0.025
United Kingdom - GBPUSD -0.182 -0.013
Japan - JPYUSD -0.277 -0.281
Romania - RONUSD -0.539 -0.089
Hungary - HUFUSD -0.833 -0.282
Sweden - SEKUSD -1.228 -0.759
Euro Member Countries - EURUSD -1.255 -0.747
Denmark - DKKUSD -1.316 -0.898
Switzerland - CHFUSD -1.629 -1.127
Czech Republic - CZKUSD -2.719 -1.197

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Latest corporate treasury survey by the Association for Financial Professionals (AFP)

Topic: Business Commentary

An interesting article today, https://ctmfile.com/story/yes-treasury-is-more-vital-than-ever-to-company-strategy highlights the role and increasing responsibilities that treasury groups have within corporations. They are the head of 'Risk', which includes a wide range of areas. Based on this survey, the key areas of concern or opportunity are displayed below:

The number 2 key area is Currency/Volatility Risk, from both a concern, but more interesting, as an area of opportunity. It is well recognized the managing currency risk for any corporation that has international exposure is a very important level of concern. What is interesting is that treasury teams are starting to look at their currency exposures as an opportunity as well. We here at Overlay Capital are introducing a more dynamic way for corporations to think about FX, and treat it as an asset that can be looked at as a potential revenue stream.

The dynamic approach includes understanding a clients cash flows on a per currency basis, and utilizing the FX swap markets to generate yields that differ on a country by country basis. With short term yields near zero percent in a lot of major countries, cash management has been limited to the accounting and operational aspects of the business. We are allowing clients to expand their thinking and start to maximize yield while maintaining all accounting operations intact. The Private Equity world are having difficulty deploying their war chest of capital into smart investments. They have been exploring and investing a portion of their 'excess' or 'idle' capital into credit opportunities to get a bump up of yield, over their normal purchase and rolling of treasury bills. We are now in discussions with CFO's at these funds to discuss allocating a portion of the cash holdings into our Overlay Capital Trading Program, along with our Adaptive High Yield Product.

We anticipate this interest expanding and look forward to releasing more articles that will explain this process in more detail. 

Overlay Capital Trading Program Daily Snapshot 2017/05/26

Topic: Trading Notes

Portfolio Performance for 2017/05/26

Daily Positions: 12
Profitable Positions (% of total): 58.33%
Maximum Drawdown: -0.74%
Daily Net Profit: -0.65%
YTD P&L: 2.45%

Comments: The long GBP against the USD and JPY were painful trades on Friday, pushing the month's return down near the lows. Friday close/ Sunday open saw the model scale back the short Yen exposure a slightly reduce the GBP longs. With US, China, Germany and UK markets (excluding FX) closed for holidays, we anticipate the currency markets to stabalize from recent uptick in currency volatility CVIX Index.

As you can see from the positions below, the model has exposure in all currencies, and we have the credit usage back up above 1. This would suggest the model is becoming more comfortable in predicting direction.

CURRENT CURRENCY EXPOSURE FORE 2017/05/29

 

TYPE MARKET UNITS
Long CAD 3,839
Long GBP 2,732
Long USD 480
Short EUR 2,800
Short AUD 496
Short CHF 1,267
Short JPY 226,423

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: Lot's of yield coming out of the currency markets these days, giving Corporate treasurers the ability to better manage their cash balances in the $5 trillion FX marketplace. We at Overlay Capital can help clients capture this yield.  

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.617 11.480
Russia - RUBUSD 8.945 8.591
South Africa - ZARUSD 8.032 7.615
Mexico - MXNUSD 7.263 6.985
China - CNHUSD 3.534 2.472
New Zealand - NZDUSD 1.672 1.668
Australia - AUDUSD 1.631 1.659
Thailand Baht - THBUSD 1.436 1.712
Poland - PLNUSD 1.423 1.405
USA - USD 0.910 0.910
Singapore - SGDUSD 0.520 0.620
Canada - CADUSD 0.455 0.392
Norway - NOKUSD 0.428 0.402
Romania - RONUSD 0.159 -0.072
United Kingdom - GBPUSD 0.072 0.014
Hong Kong Dollar - HKDUSD -0.034 -0.029
Hungary - HUFUSD -0.206 -0.200
Japan - JPYUSD -0.211 -0.324
Israel - ILSUSD -0.219 -0.367
Sweden - SEKUSD -0.623 -0.725
Euro Member Countries - EURUSD -0.640 -0.696
Denmark - DKKUSD -0.798 -0.834
Czech Republic - CZKUSD -0.928 -0.934
Switzerland - CHFUSD -1.017 -1.091

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/05/24

Topic: Trading Notes

Portfolio Performance for 2017/05/24

Daily Positions: 12
Profitable Positions (% of total): 50%
Maximum Drawdown: -0.26%
Daily Net Profit: -0.11%
YTD P&L: 3.07%

Comments: If you were watching the FX markets yesterday at 10:30, you saw the swing day traders in action. As predicted, traders were in full reverse mode for liquid pairs (notably the EURUSD). The EUR got sold hard in front of the 11am/4pm London fix. The European/London session were agressively buying the EUR for the most part, but turned as they went into their close. US based accounts tried a few more times to push it lower but Fed minutes (excuse) turned the sellers into buyers. The close we saw the market turn and stay bid. Our model, as you can see below has turned the short EUR into a long exposure. Keep in mind we don't have inputs with respect to seasonality or time of day studies, it is focused primarily on the day's range and close, as compared to previous time frames. The turn to long is significant in my opinion.

GBP (long) and JPY (short [long USD]) are now the largest exposures for the model. If any pair looked tired and ready to come under pressure, it's GBP. Clearly the model is not seeing that. We approach month-end with the Model at it's highest point of leverage.

CURRENT CURRENCY EXPOSURE FORE 2017/05/25

 

TYPE MARKET UNITS
Long CAD 990
Long GBP 4,986
Long USD 3,332
Long EUR 1,200
Short AUD 1,648
Short JPY 1,144,206
Short CHF 389

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: China yield continues to grind higher, getting an added boost from Moody's downgrade. With elections coming in the fall, you may want to load up on the currency, and let the growing dividend (via rolling spot) come in. No way the Government will allow the currency to weaken much, and when the market tries like yesterday, you buy more currency. I would look to take the trade off below 6.8000. I can see a 6.77/6.92 range until the election is secured by President Xi.

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.701 11.440
Russia - RUBUSD 8.623 8.638
South Africa - ZARUSD 8.105 7.541
Mexico - MXNUSD 7.414 6.930
China - CNHUSD 3.786 2.454
New Zealand - NZDUSD 1.646 1.663
Australia - AUDUSD 1.634 1.658
Poland - PLNUSD 1.428 1.398
Thailand Baht - THBUSD 1.328 1.763
USA - USD 0.910 0.910
Singapore - SGDUSD 0.482 0.608
Canada - CADUSD 0.457 0.391
Norway - NOKUSD 0.363 0.403
Romania - RONUSD 0.060 -0.093
United Kingdom - GBPUSD 0.025 0.011
Hungary - HUFUSD -0.003 -0.183
Hong Kong Dollar - HKDUSD -0.052 -0.023
Japan - JPYUSD -0.264 -0.323
Israel - ILSUSD -0.282 -0.378
Sweden - SEKUSD -0.657 -0.742
Euro Member Countries - EURUSD -0.661 -0.698
Denmark - DKKUSD -0.798 -0.828
Switzerland - CHFUSD -0.982 -1.089
Czech Republic - CZKUSD -1.051 -0.979

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/05/23

Topic: Trading Notes

Portfolio Performance for 2017/05/23

Daily Positions: 12
Profitable Positions (% of total): 75%
Maximum Drawdown: -0.25%
Daily Net Profit: 0.28%
YTD P&L: 3.11%

Comments: A rally in the Euro yesterday at the London open left the model's performance at the lows for the month with it's short EURUSD core exposure. The EURUSD did come under some selling pressure throughout the day giving the model a positive up day. At the close, the EUR maintained its short exposure on a net basis. The model added to the short EURGBP and continues with the short EURCAD. As you can see from the exposures below, the model is long CAD and GBP, with shorts in EUR and JPY.

Wednesday's are well known in the street as the "turn" day. There are systems that look at patterns and try and predict whether the momentum will turn as London start to close their books around 10:30, before the WMReuters 4pm (london)/11am (ET) close. I would expect to see the EUR come under waves of selling around this time, if the models short Euro exposure is to be proven correct.

China's debt was cut by Moodys last night did very little to shake the USDCNH or CNY off its stable path. We have seen the interest get squeezed higher as the authorities try and manage the growing debt problem. Moody's recognized this concern and followed with the downgrade. 

CURRENT CURRENCY EXPOSURE FORE 2017/05/24

 

TYPE MARKET UNITS
Long CAD 2,294
Long AUD 495
Long GBP 2,448
Long USD 3,259
Short EUR 6,300
Short JPY 143,419
Short CHF 195

Overlay Capital Trading Program Daily Snapshot 2017/05/22

Topic: Trading Notes

Portfolio Performance for 2017/05/22

Daily Positions: 11
Profitable Positions (% of total): 18.18%
Maximum Drawdown: -0.47%
Daily Net Profit: -0.22%
YTD P&L: 2.86%

Comments: The model continues to hold on to a short Euro exposure, and as you net out the crosses, you can see the trade is short EURUSD. We see the momentum still pushing for a higher Euro, but the model has clearly staked out its position. We have seen the model take a hit to the performance with this counter-trend trade, and we will wait and see how it turns out. The USDCAD has broken through downside support at 1.3500 level. The model has a net long CAD exposure that is mainly driven by a short EURCAD position. Against the USD is holds a short CAD trade. We will see if we get a turn in the long USDCAD position, to open the downside in a much more meaningful way. Interesting to note that the short AUDCAD trade was taken off last night, reducing the net long CAD exposure. 

CURRENT CURRENCY EXPOSURE FORE 2017/05/23

 

TYPE MARKET UNITS
Long JPY 90,210
Long CAD 1,722
Long GBP 1,386
Long USD 5,987
Short EUR 6,300
Short AUD 999
Short CHF 2,045

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: The cut in Russia interest rate has been offset by the recent rally in oil to keep the USDRUB steady around 56.50 level. Still an expensive short for spec accounts, but that is countered with a determined CB to keep the currency stable. In China, we see the Government's goal to keep the currency stable as well. The CNH and CNY are trading in lock-step for past few months. It appears that the objective will be to dampan (squash) volatility from the markets, as the Xi led Government march to the elections in the fall. Mexico looks interesting with yields holding steady above 7%. The shocking story is the bottom 10 countries expressing negative yield! Not a sign that all is stable in the world.

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.499 11.325
Russia - RUBUSD 8.721 8.718
South Africa - ZARUSD 7.861 7.435
Mexico - MXNUSD 7.273 6.869
China - CNHUSD 2.584 2.427
Australia - AUDUSD 1.781 1.645
New Zealand - NZDUSD 1.688 1.662
Thailand Baht - THBUSD 1.538 1.820
Poland - PLNUSD 1.389 1.390
USA - USD 0.910 0.910
Singapore - SGDUSD 0.589 0.612
Canada - CADUSD 0.406 0.390
Norway - NOKUSD 0.373 0.411
United Kingdom - GBPUSD 0.050 0.014
Hong Kong Dollar - HKDUSD -0.056 -0.014
Romania - RONUSD -0.122 -0.092
Hungary - HUFUSD -0.133 -0.192
Japan - JPYUSD -0.254 -0.321
Israel - ILSUSD -0.283 -0.382
Euro Member Countries - EURUSD -0.669 -0.693
Denmark - DKKUSD -0.776 -0.825
Sweden - SEKUSD -0.785 -0.748
Czech Republic - CZKUSD -1.034 -0.974
Switzerland - CHFUSD -1.084 -1.093

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/05/19

Topic: Trading Notes

Portfolio Performance for 2017/05/19

Daily Positions: 11
Profitable Positions (% of total): 36.36%
Maximum Drawdown: -0.48%
Daily Net Profit: -0.45%
YTD P&L: 3.11%

Comments: The model has been having a quiet, negative run this month. We see the CVIX, the currency volatility index, drift lower for the 3rd month in a row, until an uptick this past Thursday. What we here at Overlay Capital have noticed in the past is that the model tends to have a positive reaction after volatilty reverses course after a down trend. The uptick in volatility appears to be an interesting (outside the model) signal, and I would recommend selling Euros here at 1.12 level. Our 'Risk Assessment' for the EURUSD today is set for 102 pips, which could equate to a move down to 1.11 area.

The model is set up for a risk off type of event, showing Long CHF and JPY, and short EUR and AUD.

CURRENT CURRENCY EXPOSURE FORE 2017/05/22

 

TYPE MARKET UNITS
Long CHF 1,071
Long JPY 134,541
Long CAD 392
Long GBP 930
Long USD 4,536
Short EUR 5,100
Short AUD 3,600

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment:


Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.531 11.212
Russia - RUBUSD 8.687 8.815
South Africa - ZARUSD 7.885 7.362
Mexico - MXNUSD 7.163 6.830
China - CNHUSD 3.105 2.542
New Zealand - NZDUSD 1.641 1.649
Thailand Baht - THBUSD 1.640 1.792
Australia - AUDUSD 1.588 1.618
Poland - PLNUSD 1.358 1.376
Singapore - SGDUSD 0.910 0.582
USA - USD 0.910 0.910
Norway - NOKUSD 0.419 0.418
Canada - CADUSD 0.406 0.366
United Kingdom - GBPUSD -0.005 0.017
Hong Kong Dollar - HKDUSD -0.006 0.020
Hungary - HUFUSD -0.062 -0.196
Romania - RONUSD -0.145 -0.050
Israel - ILSUSD -0.232 -0.375
Japan - JPYUSD -0.481 -0.364
Euro Member Countries - EURUSD -0.706 -0.691
Sweden - SEKUSD -0.744 -0.760
Denmark - DKKUSD -0.917 -0.835
Czech Republic - CZKUSD -1.083 -0.981
Switzerland - CHFUSD -1.151 -1.093

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: Three country yields from our list below are worth keeping a close eye on today: Russia, China and Mexico. Russia is rumored to be toying with the idea of cutting rates by 50bps any day, in an effort to weaken the RUB. We saw the USDRUB move up through and close above the 50 day moving average yesterday. Today we see another move higher. Oil under pressure with Brent breaking below $50. has only added to the sell Ruble move. The interest rates have moved back up, suggesting the CB will not move on rates.

In China, the USDCNH and USDCNY are still sitting quietly just below 6.90 to the USD. Watching the interest rates moving up from 1.25% to 3.7% over the past few days, may indicate a move to strengthen the currency through aggressive intervention.

Mexico rates have finally appear to have topped out. Moving below 7% handle today. Spot has reacted with USDMXN rallying above 19 to the USD. 

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 10.363 10.835
Russia - RUBUSD 9.691 9.597
South Africa - ZARUSD 7.122 7.356
Mexico - MXNUSD 6.886 7.139
China - CNHUSD 3.727 2.157
New Zealand - NZDUSD 1.556 1.732
Australia - AUDUSD 1.509 1.578
Thailand Baht - THBUSD 1.256 1.446
Poland - PLNUSD 1.252 1.367
USA - USD 0.910 0.902
Norway - NOKUSD 0.447 0.500
Romania - RONUSD 0.293 -0.013
Singapore - SGDUSD 0.292 0.330
Hong Kong Dollar - HKDUSD 0.286 0.128
Canada - CADUSD 0.166 0.352
United Kingdom - GBPUSD 0.077 -0.013
Hungary - HUFUSD -0.181 -0.112
Israel - ILSUSD -0.210 -0.128
Euro Member Countries - EURUSD -0.651 -0.773
Japan - JPYUSD -0.686 -0.380
Denmark - DKKUSD -0.876 -0.863
Sweden - SEKUSD -0.899 -0.931
Switzerland - CHFUSD -1.085 -1.263
Czech Republic - CZKUSD -1.107 -2.694

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/05/01

Topic: Trading Notes

Portfolio Performance for 2017/05/01

Daily Positions: 12
Profitable Positions (% of total): 83.33%
Maximum Drawdown: -0.09%
Daily Net Profit: 0.21%
YTD P&L: 5.03%

Comments: The model has taken profit in the short JPY and CHF against the USD, and in both cases reversed positions. We have seen this before, and notice the model has a tendency to be early. In the background, our research continues to hunt for patterns to help the model slow down on these aggressive reversal trades but have found they lead to risk protection.

With the markets continuing to have stable to low volatility showing up in the implied volatility market, you should respect the models signals showing caution in buying Yen and Swiss Francs. 2 currencies that will see safe haven flows should world events turn ugly!  

CURRENT CURRENCY EXPOSURE FORE 2017/05/02

 

TYPE MARKET UNITS
Long CHF 199
Long JPY 318,781
Long CAD 971
Long EUR 200
Short USD 3,283
Short GBP 400
Short AUD 239

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment:

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 10.693 10.949
Russia - RUBUSD 9.444 9.603
South Africa - ZARUSD 9.366 7.260
Mexico - MXNUSD 7.526 7.113
China - CNHUSD 2.134 1.745
Thailand Baht - THBUSD 1.766 1.548
New Zealand - NZDUSD 1.659 1.759
Australia - AUDUSD 1.455 1.659
Poland - PLNUSD 1.350 1.358
USA - USD 0.830 0.894
Israel - ILSUSD 0.830 0.120
Norway - NOKUSD 0.364 0.531
Singapore - SGDUSD 0.315 0.391
Canada - CADUSD 0.145 0.406
Hong Kong Dollar - HKDUSD 0.094 0.095
United Kingdom - GBPUSD -0.062 -0.080
Romania - RONUSD -0.370 0.259
Hungary - HUFUSD -0.397 -0.158
Japan - JPYUSD -0.631 -0.424
Sweden - SEKUSD -1.055 -0.883
Denmark - DKKUSD -1.189 -0.868
Euro Member Countries - EURUSD -1.219 -0.815
Switzerland - CHFUSD -1.701 -1.326
Czech Republic - CZKUSD -2.309 -3.838

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/04/28

Topic: Trading Notes

Portfolio Performance for 2017/04/28

Daily Positions: 12
Profitable Positions (% of total): 58.33%
Maximum Drawdown: -0.09%
Daily Net Profit: 0.06%
YTD P&L: 4.91%

Comments: We have closed out the books for our 4th month of live trading and will publish our performance this week. We start May with long USD exposure against both JPY and CHF. We have been riding these positions for a little while. Volatility for the majors has been drifting lower for the past couple of months but we have to anticipate an uptick here with the French elections almost here and continued nervousness as tension ticks higher in North Korea. We will be adding volatility studies and how we manage risk in upcoming blogs.

CURRENT CURRENCY EXPOSURE FORE 2017/05/01

 

TYPE MARKET UNITS
Long CAD 20
Long AUD 537
Long GBP 484
Long USD 2,931
Long EUR 200
Short JPY 331,800
Short CHF 1,196

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: A couple of yields are worth watching over the next few days. Russia and China. In Russia, there are rumors that the CB will cut rates by 50bps, in an effort to weaken the RUB against the USD. We saw the currency weaken for a day last week, but this am the market is reversing course. Oil trading heavy will give the USDRUB a lift, but without a rate cut, it's very expensive to short the currency. In China, you see the yield has popped up above 2%, and both onshore (CNY) and offshore (CNH) are trading near 6.9000. Watch for the potential of yield doubling, which may be a sign that intervention is coming. Given the stability of US-China relationship at the moment, China may take the opportunity to give the Trump supporters some good news with a stronger Yuan. 

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 10.813 11.006
Russia - RUBUSD 9.592 9.466
South Africa - ZARUSD 7.369 7.002
Mexico - MXNUSD 7.069 7.061
China - CNHUSD 2.278 1.649
New Zealand - NZDUSD 1.740 1.770
Australia - AUDUSD 1.591 1.723
Thailand Baht - THBUSD 1.509 1.536
Poland - PLNUSD 1.100 1.354
USA - USD 0.910 0.910
Hong Kong Dollar - HKDUSD 0.634 0.089
Canada - CADUSD 0.499 0.440
Singapore - SGDUSD 0.440 0.440
Norway - NOKUSD 0.410 0.562
Romania - RONUSD 0.042 0.217
United Kingdom - GBPUSD -0.083 -0.082
Hungary - HUFUSD -0.127 -0.139
Japan - JPYUSD -0.184 -0.380
Israel - ILSUSD -0.189 0.002
Euro Member Countries - EURUSD -0.830 -0.768
Denmark - DKKUSD -0.897 -0.835
Sweden - SEKUSD -0.942 -0.841
Switzerland - CHFUSD -1.329 -1.280
Czech Republic - CZKUSD -2.808 -4.253

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment:

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.142 11.146
Russia - RUBUSD 9.457 8.723
Mexico - MXNUSD 7.408 7.048
South Africa - ZARUSD 7.015 6.832
New Zealand - NZDUSD 1.804 1.796
Australia - AUDUSD 1.613 1.765
Poland - PLNUSD 1.452 1.372
China - CNHUSD 1.427 1.438
Thailand Baht - THBUSD 1.329 1.525
USA - USD 0.910 0.910
Norway - NOKUSD 0.601 0.613
Canada - CADUSD 0.410 0.428
Singapore - SGDUSD 0.265 0.446
Hungary - HUFUSD 0.060 -0.250
Hong Kong Dollar - HKDUSD 0.030 0.025
United Kingdom - GBPUSD 0.011 -0.090
Romania - RONUSD -0.185 -0.326
Israel - ILSUSD -0.205 0.037
Japan - JPYUSD -0.242 -0.381
Euro Member Countries - EURUSD -0.701 -0.751
Sweden - SEKUSD -0.814 -0.801
Denmark - DKKUSD -0.818 -0.839
Czech Republic - CZKUSD -1.138 -4.928
Switzerland - CHFUSD -1.219 -1.232

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: Interesting to see the Ruble yield back above 9%. The currency has recovered the losses experienced after US-Russia tension. USDRUB failed to get to the 50 day moving average at 57.75 this week, and now has turned lower. Bullish Oil market is giving the currency a boost, on top of the high yield.

Mexico yields jump above 7%. This may take some time for the currency to get some additional benefits, as the currency has rallied over 16% this year. With the high yield, and potential for positive political outcome with respect to NAFTA, we could see the MXN rally another 400 points into the 14/16 per dollar zone.

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.300 11.253
Russia - RUBUSD 9.179 8.697
Mexico - MXNUSD 7.199 6.749
South Africa - ZARUSD 6.758 6.900
New Zealand - NZDUSD 1.843 1.718
Australia - AUDUSD 1.804 1.586
Thailand Baht - THBUSD 1.744 0.275
China - CNHUSD 1.484 2.128
Poland - PLNUSD 1.189 1.013
USA - USD 0.910 0.901
Norway - NOKUSD 0.645 0.490
Singapore - SGDUSD 0.525 0.421
Canada - CADUSD 0.369 0.289
Hong Kong Dollar - HKDUSD -0.054 -0.001
United Kingdom - GBPUSD -0.054 -0.060
Japan - JPYUSD -0.201 -0.262
Hungary - HUFUSD -0.319 -0.536
Israel - ILSUSD -0.615 -0.247
Sweden - SEKUSD -0.645 -0.790
Euro Member Countries - EURUSD -0.665 -0.729
Denmark - DKKUSD -0.781 -0.793
Switzerland - CHFUSD -1.058 -1.154
Czech Republic - CZKUSD -3.962 -11.594
Romania - RONUSD -4.781 -0.547

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/04/10

Topic: Trading Notes

Portfolio Performance for 2017/04/10

Daily Positions: 10
Profitable Positions (% of total): 50%
Maximum Drawdown: -0.1%
Daily Net Profit: -0.01%
YTD P&L: 4.37%

Comments: The performance so far this month has been very similar to how last month unfolded. Very quiet markets and that is reflected to the lower than normal model position size. The model is currently running risk at about a quarter of its normal size, with a net long USD exposure.

We have tensions rising in a number of hot spots around the world these days. We have not seen the normal flight to safety trades, buy CHF and JPY/ sell CAD and AUD. We see Gold flirting with major resistance the last couple of days, and Oil remains. Equities sit just off all-time highs and the US Treasuries remain stuck. It doesn't appear that market participants are positioned with any confidence. It looks like the model is in a similar position.  

CURRENT CURRENCY EXPOSURE FORE 2017/04/11

 

TYPE MARKET UNITS
Long AUD 200
Long GBP 900
Long USD 1,601
Short EUR 1,500
Short CAD 268
Short JPY 118,278

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: A couple of deposit rates are catching my attention today. China, with a drop off in yield indicates that intervention doesn't look imminent. The Russian yield with a 4% handle is not a reflection of where rates are in the country today, only an indication of stress in the currency due to uncertainty. The current strain on the geopolitical front, will cause traders to widen spreads in any RUB based currency product. Since we generate these yields using the normally deep FX tom next market, when stress enters the picture, traders widen prices to protect their business. Keep an eye on the yield over the next few days. Clients with Ruble exposure need to understand both price and liquidity risk when making financial decisions.

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.402 11.221
South Africa - ZARUSD 6.875 6.974
Mexico - MXNUSD 6.792 6.644
Russia - RUBUSD 4.664 8.941
China - CNHUSD 1.796 2.333
New Zealand - NZDUSD 1.714 1.687
Australia - AUDUSD 1.631 1.526
Poland - PLNUSD 1.558 0.819
Thailand Baht - THBUSD 1.013 0.021
Israel - ILSUSD 0.910 -0.159
USA - USD 0.910 0.901
Norway - NOKUSD 0.556 0.469
Canada - CADUSD 0.407 0.272
Singapore - SGDUSD 0.322 0.410
Hong Kong Dollar - HKDUSD 0.062 -0.005
United Kingdom - GBPUSD -0.013 -0.014
Romania - RONUSD -0.051 -0.033
Hungary - HUFUSD -0.268 -0.536
Japan - JPYUSD -0.299 -0.215
Euro Member Countries - EURUSD -0.630 -0.696
Denmark - DKKUSD -0.781 -0.758
Sweden - SEKUSD -0.787 -0.775
Switzerland - CHFUSD -0.981 -1.117
Czech Republic - CZKUSD -4.044 -11.834

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/03/30

Topic: Trading Notes

Portfolio Performance for 2017/03/30

Daily Positions: 10
Profitable Positions (% of total): 80%
Maximum Drawdown: -0.13%
Daily Net Profit: 0.3%
YTD P&L: 4.68%

Comments: We saw continued selling of the EURCAD cross yesterday, which gave the model's position another boost. Watching the 11am timing for fixes in currencies, did not produce any signals that would indicate the larger flows that will go through today. The FX market will brace itself today during the chaotic 10:55-11:05 ET volatility.

CURRENT CURRENCY EXPOSURE FORE 2017/03/31

 

TYPE MARKET UNITS
Long CAD 2,282
Long AUD 1,716
Long USD 2,974
Short EUR 3,900
Short GBP 500
Short JPY 63,151
Short CHF 593

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: The CNH yield continues to move higher, which in the past has signaled an intervention in the currency. The USDCNH has been trading quietly between 6.88 - 6.89 for the past couple of days. Maybe intervention will be driven as a way to give CNH/CNY a positive push prior to the President's Xi - President Trump meeting next week.

If we are correct in forecasting a higher CNH/CNY and lower USD on the back of intervention, you should prepare to sell Bitcoin.

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.287 11.233
Russia - RUBUSD 9.619 9.476
South Africa - ZARUSD 6.765 7.010
Mexico - MXNUSD 6.446 6.860
China - CNHUSD 3.838 1.857
New Zealand - NZDUSD 1.560 1.772
Australia - AUDUSD 1.491 1.502
USA - USD 0.910 0.910
Singapore - SGDUSD 0.437 0.368
Norway - NOKUSD 0.277 0.499
Canada - CADUSD 0.100 0.395
Hong Kong Dollar - HKDUSD -0.098 -0.045
Israel - ILSUSD -0.264 -0.153
Japan - JPYUSD -0.601 -0.075
Romania - RONUSD -0.835 0.003
United Kingdom - GBPUSD -0.880 0.030
Denmark - DKKUSD -1.130 -0.725
Sweden - SEKUSD -1.247 -0.769
Poland - PLNUSD -1.453 0.791
Euro Member Countries - EURUSD -1.766 -0.661
Hungary - HUFUSD -2.253 -0.422
Switzerland - CHFUSD -2.606 -1.069
Thailand Baht - THBUSD -4.343 0.318
Czech Republic - CZKUSD N/A N/A

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/03/29

Topic: Trading Notes

Portfolio Performance for 2017/03/29

Daily Positions: 9
Profitable Positions (% of total): 55.56%
Maximum Drawdown: -0.12%
Daily Net Profit: 0.35%
YTD P&L: 4.36%

Comments: The Model's short EURCAD trade paid off on the day. A drop of over 1% with the position at is max size pushed the month to date performance into positive territory. The performance so far this month has been sluggish, with the markets failing to get any sustained moves going. With the French elections getting closer, all eyes will be on Europe.

As mentioned yesterday, traders will be smart to watch the activity around the 11am (ET), 4pm (in the UK) for capital flows off of month end activity from other asset classes. Wednesday's are usually the start, but we were unable to sniff out underlying moves yesterday. We at Overlay Capital do a lot of work studying the market structure, and have methods to detect currency movements that are abnormal in nature. Given the surge in electronic execution through Bank Agency desks these days, this flow is going directly into the market, unfiltered (no Prop trading allowed). We are happy to discuss our approach with clients. Reach out to info@overlaycapital.com

CURRENT CURRENCY EXPOSURE FORE 2017/03/30

 

TYPE MARKET UNITS
Long JPY 24,348
Long CAD 5,579
Long USD 2,449
Short EUR 3,900
Short GBP 613
Short AUD 1,762
Short CHF 493

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: Interesting to watch the China Yield moving up as the USDCNH creeps towards the 6.90 level. Good idea to watch this yield to predict intervention out of China. 

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.173 11.126
Russia - RUBUSD 9.728 9.436
South Africa - ZARUSD 7.084 7.015
Mexico - MXNUSD 6.710 6.918
China - CNHUSD 2.219 1.609
New Zealand - NZDUSD 1.656 1.807
Australia - AUDUSD 1.494 1.514
USA - USD 0.910 0.910
Poland - PLNUSD 0.543 1.056
Norway - NOKUSD 0.526 0.481
Singapore - SGDUSD 0.369 0.326
Canada - CADUSD 0.236 0.418
United Kingdom - GBPUSD 0.161 0.110
Romania - RONUSD 0.117 0.062
Japan - JPYUSD 0.004 -0.039
Hong Kong Dollar - HKDUSD -0.054 -0.059
Thailand Baht - THBUSD -0.133 0.870
Israel - ILSUSD -0.183 -0.170
Hungary - HUFUSD -0.393 -0.243
Euro Member Countries - EURUSD -0.525 -0.567
Denmark - DKKUSD -0.655 -0.712
Sweden - SEKUSD -0.676 -0.745
Switzerland - CHFUSD -0.865 -0.927
Czech Republic - CZKUSD -7.236 -4.486

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/03/28

Topic: Trading Notes

Portfolio Performance for 2017/03/28

Daily Positions: 10
Profitable Positions (% of total): 60%
Maximum Drawdown: -0.11%
Daily Net Profit: 0.21%
YTD P&L: 4.01%

Comments: The Model performance has ground its way back to where it started this month at 4.26%. We have seen the FX market struggle to maintain momentum in any trend. All currencies have at some point looked ready to have a large move, only to reverse course.

At the close, the model built on its short EURCAD and now is running at full position. The EUR net short, with USD and CAD longs the largest exposures.

We will keep an eye on the 11am (ET) fixings as we approach month end Friday. There is a tendency for participants to move large flows over the final 3 days of the month. We will update our findings for tomorrows blog.

CURRENT CURRENCY EXPOSURE FORE 2017/03/29

 

TYPE MARKET UNITS
Long CAD 5,414
Long USD 3,549
Short EUR 4,100
Short GBP 500
Short AUD 592
Short JPY 174,604
Short CHF 493

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment:

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.143 11.058
Russia - RUBUSD 9.696 9.240
South Africa - ZARUSD 7.132 7.003
Mexico - MXNUSD 6.752 6.903
China - CNHUSD 1.958 1.557
New Zealand - NZDUSD 1.719 1.805
Australia - AUDUSD 1.443 1.521
USA - USD 0.910 0.885
Thailand Baht - THBUSD 0.858 0.877
Norway - NOKUSD 0.550 0.437
Singapore - SGDUSD 0.396 0.299
Canada - CADUSD 0.346 0.442
Poland - PLNUSD 0.239 1.129
Romania - RONUSD 0.181 0.016
United Kingdom - GBPUSD 0.166 0.083
Japan - JPYUSD -0.001 -0.075
Hong Kong Dollar - HKDUSD -0.007 -0.071
Israel - ILSUSD -0.175 -0.179
Hungary - HUFUSD -0.378 -0.244
Euro Member Countries - EURUSD -0.500 -0.608
Denmark - DKKUSD -0.581 -0.756
Sweden - SEKUSD -0.676 -0.780
Switzerland - CHFUSD -0.879 -0.968
Czech Republic - CZKUSD -4.294 -4.022

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/03/27

Topic: Trading Notes

Portfolio Performance for 2017/03/27

Daily Positions: 9
Profitable Positions (% of total): 66.67%
Maximum Drawdown: -0.47%
Daily Net Profit: 0.04%
YTD P&L: 3.76%

Comments: The Model abandoned its short AUDCAD position at the close and has turned it into a small long. The short Yen trade (against GBP and USD) was also reduced.

The equity market appears to be the leading indicator for all asset classes these days. Global political stories from Korea, France, UK and US are key drivers that are creating a lot of uncertainty, and moving flows from risk-off/risk-on trades. The Yen has been a easy way to monitor the sentiment.

The Model is heading into the final few days of the month. It is currently down 50 bps on the month, well within what we have experienced during our deep analysis with the historical research. We will publish our detailed performance sheet at month end.

CURRENT CURRENCY EXPOSURE FORE 2017/03/28

 

TYPE MARKET UNITS
Long CAD 5,220
Long USD 668
Short EUR 2,800
Short GBP 500
Short AUD 43
Short JPY 41,328
Short CHF 493

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment:

There were a couple of articles around this weekend discussing that the Ruble is poised to weaken this year. Taking a look in the Country Yield table below, you can see that the Russian O/N yield is still pushing close to 10%. That's a lot of head wind for spec accounts looking to short RUB.

The more interesting play continues to be owning MXN currency. You get the boost from the currency and a solid interest rate in this low rate environment. 

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.211 11.049
Russia - RUBUSD 9.668 9.189
South Africa - ZARUSD 7.058 6.989
Mexico - MXNUSD 6.758 6.920
China - CNHUSD 1.963 1.513
New Zealand - NZDUSD 1.728 1.814
Australia - AUDUSD 1.444 1.530
Poland - PLNUSD 0.927 1.228
Thailand Baht - THBUSD 0.863 0.880
Norway - NOKUSD 0.534 0.425
Canada - CADUSD 0.347 0.453
Singapore - SGDUSD 0.315 0.289
Romania - RONUSD 0.162 -0.002
United Kingdom - GBPUSD 0.132 0.073
Hong Kong Dollar - HKDUSD -0.012 -0.078
Japan - JPYUSD -0.032 -0.083
Israel - ILSUSD -0.274 -0.179
Hungary - HUFUSD -0.349 -0.228
Euro Member Countries - EURUSD -0.496 -0.620
Denmark - DKKUSD -0.625 -0.775
Sweden - SEKUSD -0.690 -0.791
Switzerland - CHFUSD -0.881 -0.978
Czech Republic - CZKUSD -3.260 -3.991

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/03/23

Topic: Trading Notes

Portfolio Performance for 2017/03/23

Daily Positions: 12
Profitable Positions (% of total): 75%
Maximum Drawdown: -0.3%
Daily Net Profit: 0.27%
YTD P&L: 4%

The Model has held onto Its long GBPJPY position alsong with the short AUDCAD trade.

CURRENT CURRENCY EXPOSURE FOR 2017/03/24

 

TYPE MARKET UNITS
Long CAD 629
Long GBP 3,000
Long USD 6,084
Long EUR 2,100
Short AUD 3,000
Short JPY 813,155
Short CHF 2,980

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: Interesting note from the Yield Chart below is in Japan. We see the O/N yield pop above 0% (10 day average -13 bps). Appears to be providing support for the Yen as the dollar struggles to get above 110.00. Keep an eye on this rate as Japan moves towards their year end, and the balance sheet supply/demand will impact the currency. 

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.23 10.87
Russia - RUBUSD 9.83 9.25
Mexico - MXNUSD 7.65 6.78
South Africa - ZARUSD 6.92 7.06
New Zealand - NZDUSD 1.86 1.85
Australia - AUDUSD 1.52 1.58
Poland - PLNUSD 1.29 1.33
China - CNHUSD 1.17 1.87
Thailand Baht - THBUSD 0.88 1.03
Norway - NOKUSD 0.51 0.38
Canada - CADUSD 0.48 0.46
Singapore - SGDUSD 0.37 0.23
Japan - JPYUSD 0.17 -0.13
United Kingdom - GBPUSD 0.15 0.07
Romania - RONUSD 0.09 -0.02
Israel - ILSUSD -0.07 -0.19
Hong Kong Dollar - HKDUSD -0.08 -0.09
Hungary - HUFUSD -0.18 -0.21
Euro Member Countries - EURUSD -0.54 -0.63
Denmark - DKKUSD -0.69 -0.79
Sweden - SEKUSD -0.74 -0.80
Switzerland - CHFUSD -0.89 -1.01
Czech Republic - CZKUSD -1.91 -3.39

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/03/22

Topic: Trading Notes

Portfolio Performance for 2017/03/22

Daily Positions: 12
Profitable Positions (% of total): 33.33%
Maximal Drawdown: -1.11%
Daily Net Profit: -0.49%
YTD P&L: 3.77%

As you can see above, the Model's P&L saw some wild swings intraday, capped with a worse case drawdown of 1.1% during the early part of the day. We at Overlay Capital have monitoring tools that help us manage the program's risk on a live basis. We incorporate this information into our studies for pattern recognition research, in addition to our risk management process. Clients have the ability to drill down into the trading day to isolate any exposure for a better understanding of what is moving the market.

The Model continues to stick with an overweight to long GBP and short JPY, and a short AUDCAD position. The AUDCAD has been underwater for a few days, but this trade looks to have started to rollover. Given the terrorist activity in London yesterday, the market didn't really go into a full on Risk Off market. The CHF has come under pressure today after seeing strength yesterday.

CURRENT CURRENCY EXPOSURE FORE 2017/03/23

 

TYPE MARKET UNITS
Long CAD 1,246
Long GBP 6,220
Long USD 1,860
Short EUR 1,100
Short AUD 3,300
Short JPY 765,269

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment:

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.28 10.80
Russia - RUBUSD 9.60 9.25
South Africa - ZARUSD 7.04 7.08
Mexico - MXNUSD 7.03 6.65
New Zealand - NZDUSD 1.82 1.84
Australia - AUDUSD 1.47 1.58
Poland - PLNUSD 1.27 1.35
China - CNHUSD 1.17 2.15
Thailand Baht - THBUSD 0.81 1.07
Norway - NOKUSD 0.53 0.37
Canada - CADUSD 0.53 0.45
Singapore - SGDUSD 0.34 0.20
United Kingdom - GBPUSD 0.12 0.07
Romania - RONUSD 0.04 -0.04
Japan - JPYUSD 0.04 -0.15
Israel - ILSUSD -0.02 -0.20
Hong Kong Dollar - HKDUSD -0.08 -0.09
Hungary - HUFUSD -0.26 -0.21
Euro Member Countries - EURUSD -0.55 -0.63
Denmark - DKKUSD -0.65 -0.80
Sweden - SEKUSD -0.73 -0.79
Switzerland - CHFUSD -0.90 -1.02
Czech Republic - CZKUSD N/A N/A

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/03/21

Topic: Trading Notes

Portfolio Performance for 2017/03/21

Daily Positions: 11
Profitable Positions (% of total): 100.00%
Maximal Drawdown: -0.21%
Daily Net Profit: 0.78%
YTD P&L: 4%

The Model's performance reversed a couple days of losses as the GBP got a huge lift after inflation data cam in much higher than the market was expecting. It clearly shows that the market is short GBP, and does not have a lot of tolerance for pain. The Model has maintained a long bias in the GBP going into today's trading day. The AUDCAD has been bid for over a week and that showed some weakness during the day. The failure to stay above 1.03 has brought in profit taking. The Model remains short at lower levels and today could be the day for the market to try and shake out more long positions.

As you can see from the table below, the JPY is the largest position and after being neutral against most pairs this week. The Model was riding a net short USD position this week and last nights close saw that turn into a decent short USD. It will be interesting to see the US equity market after yesterday's over 1% decline. The model appears to be betting that we could see a rally there. That would appear counter to the Model's SPX signal, which remains short for the day. 

CURRENT CURRENCY EXPOSURE FORE 2017/03/22

 

TYPE MARKET UNITS
Long CAD 1,923
Long GBP 4,967
Long USD 6,286
Long EUR 1,600
Short AUD 3,778
Short JPY 1,091,264
Short CHF 2,983

Country Yields via Short Date FX Swaps

Topic: Business Commentary

 

 

Country Yield 10 Day Average Yield
Turkey - TRYUSD 11.38 10.74
Russia - RUBUSD 8.16 9.23
South Africa - ZARUSD 7.11 7.10
Mexico - MXNUSD 6.71 6.56
New Zealand - NZDUSD 1.70 1.83
Australia - AUDUSD 1.47 1.59
Poland - PLNUSD 1.25 1.37
China - CNHUSD 1.17 2.16
Thailand Baht - THBUSD 0.81 1.06
Canada - CADUSD 0.56 0.44
Norway - NOKUSD 0.55 0.36
Singapore - SGDUSD 0.29 0.14
United Kingdom - GBPUSD 0.13 0.07
Romania - RONUSD 0.09 -0.03
Japan - JPYUSD -0.01 -0.15
Hong Kong Dollar - HKDUSD -0.07 -0.08
Israel - ILSUSD -0.12 -0.23
Hungary - HUFUSD -0.35 -0.22
Euro Member Countries - EURUSD -0.52 -0.63
Sweden - SEKUSD -0.72 -0.79
Denmark - DKKUSD -0.73 -0.80
Switzerland - CHFUSD -0.90 -1.03
     

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/03/20

Topic: Trading Notes

Portfolio Performance for 2017/03/20

Daily Positions: 12
Profitable Positions (% of total): 16.67%
Maximal Drawdown: -0.62%
Daily Net Profit: -0.44%
YTD P&L: 3.45%

The model had another down day with the core GBP under pressure against the USD and JPY, along with a surging AUDCAD (model portfolio is short). The model maintains both it's long AUDCAD and GBP exposure but has reduced the short Yen position in the portfolio today.

Looking at the daily charts, you can see this powerful rally in the AUDCAD continuing to test recent highs at 1.0400 level. The model historicaly will be early when countering strong trends as the inputs are looking at indicators that will look for weaknesses to get in front of. The model is an active program and takes in the daily activity from momentum and volatility measurements to determine future direction.

CURRENT CURRENCY EXPOSURE FORE 2017/03/21

 

TYPE MARKET UNITS
Long CHF 2,992
Long CAD 2,912
Long GBP 5,947
Short EUR 1,900
Short USD 7,049
Short AUD 3,878
Short JPY 56,212

G20 Meeting 3/17/17 Focused on Current Account Balances

Topic: Market Commentary

 

Reading through the G20 highlights from this weekend, I think the fastest way to assess what the future holds for managing currency exposure can be summed up in the table/s below. The focus is on trade, and which countries will have the ability to manage their currency rates to help their internal economy. Looking at the left side, we see the countries with surpluses and to no surprise, we have China, Euro and Japan heading up the list. With the US heading up the right hand side of the table with a massive deficit, you can rest assured the message that will be coming loud and clear that the pressure is on for China, Euro and Japan to back away from the weakening currency strategies that have been employed to date. Outside of Japan, these countries have not made any statements to weaken their currencies, but now the pressure will be there to make a stand.

"This is my first G20, so what was in the past communiqué is not necessarily relevant from my standpoint," Treasury Secretary Steven Mnuchin said during the summit. "I understand what the president's desire is and his policies, and I negotiated them from here," Mnuchin said. "I couldn’t be happier with the outcome," he said, according to Reuters."  - We at Overlay Capital use this metric, along with country yields, as some of the factors to calculate weightings for our recommended strategies to hedge FX risk on a fundamental basis. Our Innovative adaptive methodology combines fundamental, technical and derivative indicators to create a proprietary signal used to drive trading models and overlay strategies.

We will be adjusting our inputs to reflect positive inputs for countries with a trade surpluses, and negative values for countries with trade deficits. Keep in mind that our indicators can appear to be counter to market logic, but are designed to anticipate pressures on a go forward basis. The news cycle via online platforms are a major source for trader flows.

We encourage questions and comments, at info@overlaycapital.com 

Overlay Capital Trading Program Daily Snapshot 2017/03/16

Topic: Trading Notes

Portfolio Performance for 2017/03/16

Daily Positions: 11
Profitable Positions (% of total): 63.64%
Maximal Drawdown: -0.25%
Daily Net Profit: 0.26%
YTD P&L: 4.27%

 

CURRENT CURRENCY EXPOSURE FORE 2017/03/17

 

TYPE MARKET UNITS
Long CAD 1,906
Long GBP 1,420
Long USD 6,789
Short EUR 1,900
Short AUD 2,178
Short JPY 709,083

 

The model is heavily weighted to a long USDJPY exposure. Going into the G20 meeting over the weekend, it will be interesting to see where the model's portfolio is positioned at the end of today.

Country Yields via Short Date FX Swaps

Topic: Business Commentary

Comment: Watching the yields, relative to their 10-day moving average, is a good way to monitor the short-term activity in the country's domestic money markets. It will often tip the central bank's hand in how they are looking to move the direction of the interest rates while maintaining a balance for currency supply/demand. Below it is interesting to see the RUBUSD interest rate dropping against the 10-day average. With spot USDRUB moving lower (stronger Ruble), it appears that the central bank will want to slow down the pace of this Ruble rally. Most central banks goals are to dampen volatility in the FX market and slow down of larger directional moves. The Ruble has been quietly strengthening for over a year, and with Oil coming under recent downward pressure, it's in the country's best interest to quietly accumulate USD reserves.  

 

Country Yield 10 Day Average Yield
TRYUSD Turkey 10.49 10.67
RUBUSD Russia 7.77 9.21
ZARUSD South Africa 6.97 7.10
MXNUSD Mexico 6.55 6.36
CNHUSD China 1.70 2.11
NZDUSD New Zealand 1.63 1.80
AUDUSD Australia 1.57 1.55
PLNUSD Poland 1.27 1.40
CADUSD Canada 0.47 0.44
SGDUSD Singapore 0.10 0.12
NOKUSD Norway 0.08 0.36
THBUSD Thailand Baht -0.05 0.90
GBPUSD United Kingdom -0.11 0.11
HKDUSD Hong Kong Dollar -0.17 -0.04
ILSUSD Israel -0.27 -0.27
RONUSD Romania -0.34 0.01
JPYUSD Japan -0.36 -0.09
HUFUSD Hungary -0.40 -0.27
EURUSD Euro Member Countries -0.93 -0.58
SEKUSD Sweden -1.02 -0.77
DKKUSD Denmark -1.09 -0.77
CHFUSD Switzerland -1.27 -1.01
CZKUSD Czech Republic -2.60 -1.29

 

 

Creating Yield through Currency Swaps - The world of Overnight Money Markets and the Foreign Exchange Markets are closely related. As interest rates rise and fall, a form of arbitrage opportunity presents itself in the Foreign Exchange Market. This form of Carry Trade creates new price discovery mechanism for the Overnight Money Market that eventually brings equilibrium between the overnight interest rates in domestic money markets and those achieved in the OTC FX swap markets.

 

The OTC FX swap market represents the interest rate differential between two countries. By using the FX swap market prices and the federal reserve effective fed funds rate, we are able to generate daily yields for each country. Combining this with our Adaptive Hedging Methodology creates a unique Adaptive Carry strategy. 

Email us for more information about our yield generating Adaptive Carry strategy info@overlaycapital.com

Overlay Capital Trading Program Daily Snapshot 2017/03/14

Topic: Trading Notes

Portfolio Performance for 2017/03/14

Daily Positions: 11
Profitable Positions (% of total): 27.27%
Maximal Drawdown: -0.47%
Daily Net Profit: -0.37%
YTD P&L: 4.3%

Model positions took a hit on the sell off of GBP against the USD and JPY. The short EUR, long GBP impacted the portfolio as well. The AUDCAD short position didn't work out today, but limited impact.

The model maintained most of the positions going into the new trading day, except for a reduction in EURGBP.

CURRENT CURRENCY EXPOSURE FORE 2017/03/15

 

TYPE MARKET UNITS
Long CHF 3,023
Long CAD 2,092
Long GBP 4,098
Long USD 131
Short EUR 400
Short AUD 3,444
Short JPY 763,422

Overlay Capital Trading Program Daily Snapshot 2017/03/13

Topic: Trading Notes

Portfolio Performance for 2017/03/13

Daily Positions: 11
Profitable Positions (% of total): 45.45%
Maximal Drawdown: -0.23%
Daily Net Profit: 0.11%
YTD P&L: 4.73%

For almost a week, the portfolio has been relatively range bound. The FX markets in general have seen movement intraday, where flows will move the pairs, but they seem to be comfortable drifting back to the mean. We see that in our model performance.

 

As you see with our individual currency exposure going into the new trading day, we are weighted to a long GBP and short JPY exposure. The model indicators are not fearing the political pressures inside Britain as Scotland threaten to align with Europe and leave the Union. The market is gearing up for moves after recent quiet, controlled markets.

CURRENT CURRENCY EXPOSURE FORE 2017/03/14

 

TYPE MARKET UNITS
Long CHF 2,720
Long CAD 2,902
Long GBP 4,669
Long USD 573
Short EUR 1,600
Short AUD 3,663
Short JPY 763,422

Overlay Capital Trading Program Daily Snapshot 2017/03/09

Topic: Trading Notes

Portfolio Performance for 2017/03/09

Total Net Profit: 0.06%
Total Positions: 11
Profitable Positions (% of total): 83.33%
Maximal Drawdown: -0.24%

Looking at the peak - trough (max drawdown for the day) at 24 bps tells the story in the market over the past few days. Range bound markets. We ended the day with the year to date at 4.76%.

Current Currency Exposure for 2017/03/10

 

TYPE MARKET UNITS
Long AUD 2154
Long GBP 3787
Long USD 2522
Long EUR 1200
Short CAD 2833
Short JPY 691043
Short CHF 1926

The model has maintained the long GBPJPY and long AUDCAD. It added to the long USD CAD and CHF positions. With the elections in the Netherlands next week, and fear that another Populist Government coming to power, and the French down the road all threatening to break up the Euro, has left the EUR on the verge of a push to parity. Problem is, the market is positioned for that, and the longer it tries to test the lows at 1.05 area and fails, the shorts may start to panic. Friday we get the US employment data. Strong ADP today pushed the 10 year bond yield up to 2.60%. That was the trigger that Bill Gross (former Bond King) pronounced as the last hurdle before 3% is tested. I guess a disappointing non-farm number at 8:30 could be the trigger for Euro shorts to cover.

We at Overlay Capital have made tremendous progress in automating our systems. We have the ability to monitor positions at a very detailed level. We are happy to discuss our process with any interested parties. Email us at info@overlaycapital.com 

 

February Model Portfolio Performance

Topic: Trading Review

We finished our second month of trading, we are up 2.57% in February, YTD up 4.26%. Very proud of our team, and what we were able to accomplish in a very short time, system and process we were able to put together. As in January, we trade 12 currency pairs, with very little leverage using our daily trading signals. On average we using 1 to 1.5 leverage and maximum leverage in February was about 2 to 1. March so far looks similar to the first two months.

Click here to view our February Month End Report: Trading Performance 300 Program - February 2017 (PDF)

Positions and observations

Topic: Trading Notes

Model portfolio for Mar 7 2017

The model maintains its short AUDCAD position, and has gone long EUR against the USD. GBP exposure is zero, which is surprising with GBP approaching significant lows against the USD. Given the model has a tendency to look and act on mean reversion setups, I would say the GBP has further room to fall.

Another pair that catches my eye is the EURCHF. USDCHF has been bid for a couple of weeks, and I think the real move will be seen through the cross. Given the O/N rate in Swiss has a 10 day moving average of -1.0%, it has been a costly position to hold as protection against risk. With Europe, Britain and US political news watch a major risk, North Korea ballistic missile launch into Japan Sea and Russia twitching to unleash their new found power, I would assume the market had a build up of fear. Watch the cross!

Yesterday, Mar 6, the model lost 13 bps leaving the year at +4.83%.

Positions and observations

Topic: Trading Review

Model portfolio for trade date Mar 6 2017

The biggest mover in the portfolio Friday was the AUDCAD cross. Both pairs against the USD looked relatively stable, but the models short cross saw an early selloff and then as Europe came in, traders were able to push the cross higher. The model maintained its short position. The USDJPY rally looks to have peaked Friday above 114.50. Nervousness in the marketplace after chaos coming out of the US administration doesn't appear to have hurt the US equity rally, which in turn should support the USD against the majors. This am I notice USDCHF has not come under pressure which would support the view that the markets are not in any kind of panic mode.

Looking at the models portfolio you can't help but notice the positions are decidedly short commodity currencies. It may be important to keep an eye on Gold and Oil today. The overnight market doesn't provide insight into a direction yet, with gold up 0.5% and oil down about the same. The 10 year will be watched closely as the Fed Chairman and some presidents were pushing forward with a rate increase later this month. The yield is back to 2.50% after quietly drifting below 2.35 late last month. We have the ECB and their rate decision out Thursday, and here in the US we will get the employment data on Friday.

The model showed a gain of 40 bps to end last week, making the year to date a decent +4.96% 

Positions and observations

Topic: Trading Review

Model portfolio for Mar 3 2017

The dollar was strong yesterday and even though the model's portfolio had a net short USD, it was able to grind out a positive 10 bps for the day. Early strength in AUDCAD with both AUDUSD and the USDCAD holding a bid tone. All three gave back those gains in early European time, and continued to add positive value to the portfolio. The short AUDCAD position is still intact for today's trading. The AUD did sell off the highs and as predicted yesterday, appears headed to test the .7522 200 day MA.

The model turned the short USDJPY to a long position. It liquidated the short USDCHF position and is left with a net long USD and long EUR position for today. The EURUSD pair will be watched to see if the 1.0500 level can hold. More psychological than a technical level, but it has been testing it for the past couple of weeks, and today could provide either a break below, or the start of a rally back to test 1.0675. The model is betting on the move higher for the day.

As mentioned, the model was up 10 bps for the day and is now up 4.56% for the year.

Positions and observations

Topic: Trading Notes

Model Portfolio for trade date March 2 2017

The model, after running a short Yen exposure for a few days got a turn signal at the close last night. It is now set with a short USD, GBP and AUD positions. The short AUDCAD trade that the model has been holding looks to be the most problematic pair. USDCAD has been bid for a few days after it broke out of 1.30/1.32 range, and now testing 1.3400 level. The AUD, has been quietly bid for past few weeks after massive Aussie buying from long term traders. The fact that AUD failed at .7700, we may be ready for a reversal in the pair and retest the 200 day m,a. at .7521

For the day, the model gained 20 bps on the first day of the month, pushing the year to date to +4.46%

Positions and observations

Topic: Trading Review

The model portfolio for trade date Mar 1 2017

As you can see from the portfolio above, the model has a core long USD against both GBP and AUD. Along with a long CAD and CHF against the USD.

We finished the month with a positive 2.57% after making 16 bps on that final day. For the year, the model is +4.26%. 

*We will be publishing our Month-end Report in the next day or two.

Positions and observations

Topic: Trading Review

Model portfolio for trade date Feb 28 2017

Markets were relatively stable for most of the Asian and European session. The EUR and GBP and the major crosses came under pressure as North American markets opened and continued the selling through option expiries and through the 11am (ET) fixes. As we crossed mid day, most of the markets reversed direction and rallied through to our close. The model had held onto the long GBP and EUR against JPY and was able to recapture a lot of the losses from Friday.A similar pattern was seen in the AUDCAD which held a long position.

Today's closing signals saw a reversal in a most of the pairs and is now short EURJPY and GBPJPY as well as turning short in AUDCAD, going into the last trading day for the month of February.

For the day, the model gained 60 bps, and is now up 2.41% on the month, and +4.10% for the year.

Positions and observations

Topic: Trading Review

Model portfolio for Feb 27 2017 trade date:

The model positions on Friday were dominated by long GBP and EUR against  a short Yen exposure. The pressure to sell those currencies resulted in a tough day for the model. Overnight, we saw some of the longs reduced and the model held on to these same exposures. We saw the model flip the short AUDCAD position.

On Friday, the portfolio dropped 110 bps to move the year to date down to a +3.50%, as we come into month end on Tuesday.  

Macro Views - Preparing for Spring

Topic: Market Commentary

Scanning the news headlines and upcoming events, it is clear that uncertainty will continue into the Spring. With European elections coming quickly, and the potential for continued move to populist leaders. This will raise the risks of changes that may or may not pan out as planned, leading to continued uncertainty/ volatility. Oil prices and inflation in general are attracting two-sided wagers. Interest rates are sitting at extreme lows in some countries, and starting to move into new trends in others. But that's what the marketplace is designed to do, offer an environment to place your bets on turning a small amount of money into a larger amount of money.

The challenge will be figuring out the most cost efficient way to express a view that will capitalize on this "obvious" volatile/uncertain future. If you look at the VIX (thanks to finviz.com), standard for measuring volatility in US equities:

It's pretty clear, the market is struggling to support an imminent surge in volatilty in equities. Below is a chart of Deutsche Bank's Volatility Index for Currencies (CVIX Index):

Again, no worries showing up in this chart either. So it's clear, you can't depend on getting the signal from a historical view of volatility. Investors need to spend a lot of time focusing in on all the factors that will attempt to give them a view that they can actually turn into a market wager with the right amount of dicipline to patiently wait for the move to unfold.

At Overlay Capital, we help clients make their decisions a little easier. We provide tools that give a simple weighted directional recommendation on currencies, commodities, fixed income and equity indexes. Our goal is to take over the analysis step for the investment; taking a measured, quantitative approach, freeing the client to execute the trade that makes sense to them.

Positions and observations

Topic: Trading Notes

Model portfolio for Feb 24 2017

The model positions were relatively quiet yesterday with a tight NAV range. The model has maintained its long GBP short JPY exposure. The short AUDCAD trade is still on, and by the end of the day it was finally losing steam and may be poised to head lower going into the weekend. We initiated a short USDCHF trade at the close.

For the day, the model was up 6 bps, putting the year to date at a + 4.66%

Positions and observations

Topic: Trading Notes

Model portfolio for trade date Feb 23 2017

The model had some large swings in NAV throughout the trading session. After yesterday's closing value was 5.0% (year to date), we saw the NAV move in the Asian session to 5.25%, before reversing about 1%. By the close, it crept back to 4.60%. This was driven by a number of currencies, With EUR failing to hold the gains and selling pressure hit the market before Europe came in. The EUR stayed under pressure along with USDJPY adding to the models woes. By late am here in NY, coinciding with the 11am fixings, we saw the EUR and USDJPY recover smartly. The Aussie rallied throughout the early stages yesterday, going against the net short model position, mostly against CAD. GBP has long exposure against both the USD and the JPY. Again, early in the trading session we saw a strong GBP, but that gave way just before Europe opened.

When you take a step back and look at the currency markets from a macro perspective, you have a bullish US environment, and a lot of uncertainty throughout Britain and Europe from a political view. That includes an unpredictable President here. The interest rate markets alone paint a very bullish USD picture, but nervousness from the White House is making the buy USD across the board story uncomfortable, leading to a wider range in currencies, but no clear direction.

The model has shifted last night to a net long USD exposure, but maintained a long GBP against the 3 majors (JPY, USD and EUR) for it's second largest position, with net short JPY the largest, followed by a short AUDCAD trade.

For the day, as mentioned above, the model lost 40 bps, leaving the year to date up 4.60%.

Positions and observations

Topic: Trading Notes

Model portfolio for trade date Feb 22 2017

The model and it's long core USDJPY, short EUR and AUD saw some solid gains. At the close, we saw a reversal in the EUR and as you can see the model now has a short Yen, long EUR and GBP bias. It has also built on it's short AUD against both EUR and CAD.

For the day the model was up 71 bps, to get the year to date to 5.00%. Another new high for the year.

Positions and observations

Topic: Trading Notes

Model portfolio for trade day Feb 21 2017

A relatively quiet market today saw the portfolio not show any major swings in value. Early in Asia session saw a weaker Yen, which the model is positioned for. The model maintains a long USD short JPY bias going into the new trading day.

The model lost 3 bps today, with the year to date at +4.29%.

Positions and observations

Topic: Trading Notes

Portfolio view for trade day Feb 20 2017:

A strong day on Friday where the model picked up almost 1% on the back of a long Yen exposure against the USD, EUR and GBP. Gains were also seen in long Swiss (short USD) exposure. 

As shown above, we saw a stream of reversals or a lot of the pairs and the model at Sunday open had short JPY exposure against EUR, GBP and USD. The model also reversed the long CHF to a long USD and short CHF. These reversals are a reflection of the non directional bias for the most part, for many of the currencies. This may be explained by the volatility from the global political situation, and may be a warning sign. We have a lighter than normal trading day as we celebrate President's Day here in the US.

Friday's trading day resulted in a gain of 97 bps, getting the year to date return up to +4.32%.

Positions and observations

Topic: Trading Notes

Portfolio for Feb 17 2017:

First view of the position of the pairs inside the portfolio shows a huge skew to the short side. Outside the USDCAD long, all other individual pairs are short. We maintained the short EURUSD, USDCHF, USDJPY and short AUDCAD. The model liquidated the long EURGBP, and gone short from long in EURJPY, GBPJPY and GBPUSD. Decent size move within the portfolio and as you see above, the largest net positions are short EUR against JPY.

For the day, the model lost 10 bps and sits at a +3.35% for the year.

January Month End Report

Topic: Trading Review

As many of you know, January was our first live trading month. We trade 12 currency pairs, with very little leverage using our daily trading signals. We did a lot of back-testing before and I am very pleased to say that performance and behavior of our live trading account is very similar to what we saw in our back-tests, same volatility and p&l swings. For the month of January, we are up 1.69%. We were able to achieve this return with very little leverage, on average we were using less than 2:1 leverage. February so far looks similar if not better. I'll publish our February Month End Report when it becomes available.

Overlay Capital Trading Program - January Month End Report (PDF)

 

Positions and observations

Topic: Trading Notes

Trade portfolio for Feb 16 2017

The portfolio remains long GBPJPY, long GBPUSD and with a long EURGBP, reducing, but leaving the model net long GBP. As you can see, the EUR nets to a small short exposure. The other main position is a short AUDCAD trade, that saw the Aussie trade firm for most of the day. The other interesting trade was the model finally getting out of a long USDCHF position. That had been underwater for most of the time and just in the last day recovered. Last night the model got a reversal, and sits short USDCHF. Given history of the SNB day (Jan 15 2015), it always feels better being long CHF!

For the day, the model gave back 17 bps, with the year to date at 3.45%.

Positions and observations

Topic: Trading Notes

Model portfolio for Feb 15 2017:

Yesterday, Feb 14th, the model saw a decent size swing on the day. Early on, the Yen showed strength and the models core long dollar position with a heavy weight against the JPY saw losses. The GBPJPY was the primary position (long) once again. The short EUR, AUD and CHF helped cushion the move.

As mentioned, the main culprit was the GBP at 4:30am the inflation data came out of the UK. A surprise on the strong side, coupled with zero chance the BOE are in a position to raise rates gave the market the opportunity to sell GBP agressive.Both our net long GBP pushed the model down about 50 bps at one point. The model weathered the storm and as the 10am option expires hit, and a number of pairs were at key levels where clearly there were buy USD exposures. We saw sharp moves in favor of the dollar, and the model swung to gains of 100 bps from the low. We didn't trigger any of our intraday signals to reduce or increase risk.

The model settled for a 25 bps gain on the day, leaving the year to date at +3.62%.

Positions and observations

Topic: Trading Notes

Model portfolio for Trade Date Feb 14 2017:

The Yen continued to weaken on the day, along with the EUR against the USD. The DXY moved higher by 0.20% on the back of another record high for the US equity markets. The model has a core long USD which resulted in an up day. 

We saw another decent buyer at the 11am WMR fixing. GBP has held it's ground these past few weeks as the market appears to be covering longer term short positions. The model flipped it's short GBPJPY position entered last night, and has gone long. The rest of the signals were mixed and as you can see above, it remains long USD on a net basis.

The model picked up 27 bps on the day, leaving the year to date at +3.37%. 

Positions and observations

Topic: Trading Notes

Portfolio is set for trading Feb 13 2017:

Friday was a decent follow through for the model. The long GBPJPY and long USDJPY positions for a few days continued to trade stronger. It appears the Yen weakness will continue. It appears the Trump-Abe meeting didn't address Japanese manipulation of the currency. Let's see how that pans out over the next few days, as the headlines these days could come from any section of the globe. All countries are looking to weaken the currencies, without really stating it.

As you can see above, the model has flipped the GBPJPY long to short at the open. We see the USD stronger at the opening, and given the model's heavy weight to a long USD exposure, we are seeing that reflected in the NAV early in the trading day. The Aussie position has turned to a net short exposure. AUD has been struggling to make further gains to the topside after breaking the long term 10/240 moving average crossover system. Given the recent slide in Kiwi, I expect the AUD to see pressure over the next 24 hours.

Friday, the model picked up another 23 bps, getting the return back to the year high at +3.10%.

Positions and observations

Topic: Trading Notes

Model Portfolio Positions for Trade Date Feb 10 2017

The models short JPY exposure paid off today as we saw weak Yen against the USD and GBP. Tonight, the model remains with a heavy weight to a long USD exposure against JPY, CHF and CAD.

The model gained 105 bps today, pushing the year to date up to +2.87%.

Positions and observations

Topic: Trading Notes

Portfolio for trade date Feb 9 2017

As indicated above, the model has remained with a short Yen position, split against the USD and GBP. We had a limited number of trades to add tonight. We reversed the short EURGBP position and have gone long. We cut out the long EURCAD, and added to the long GBPUSD position.

We did notice another buyer in the GBP (against USD it appeared) at the 11am (4pm London) WMR fixing today. The AUD is starting to look a little tired after making a move late last month to trade and stay above the 200 day ma. It may be impacted by the sell off in NZD yesterday. Our model does not include NZD currently, but it is an important currency and the Aussie will get dragged with it at times. The AUDNZD cross is popular, and it has been hovering just above parity for some time.

The currency markets in general have been struggling to get direction from the broader dollar move. The Trump impact has seen offsetting forces. The US from a growth and interest rate environment appears ready to march higher, but ongoing criticism and trade war threats from the administration are putting a lid on the topside. There was a lot of talk of the potential for a tax holiday for the US companies with massive cash sitting offshore. If there was an announcement and comfort that companies would take advantage, we would see the dollar surge, and the Euro would see the most impact and we would test parity against the USD. But, these offshore regions have provided these US companies low tax incentives that may make it very expensive for them to actually follow through. So we sit, with the DXY hovering around 100.

On the day, the model gave back 20 bps, with the year to date at +1.82% 

Positions and observations

Topic: Trading Notes

Portfolio for trade date Feb 8 2017

The long GBPJPY paid off yesterday, or I should say recovered some of the loss for the past few days. The market looks to have had a very large buying interest at the WMR fixing yesterday.The USD was in favor and with our core net long USD exposure we had a positive day.

Going into today's trading day, the model remained with a lot of the same trades on, including the long GBPJPY and USDCHF, along with a short EURUSD. We did see the model flip from short AUDCAD to a long exposure in the cross.

The WMR fixings should be watched today and see if there is continued buying of GBP.

For the day, the model gained 65 bps, with the year to date at +2.02%

Positions and observations

Topic: Trading Notes

Portfolio for trading day Feb 7 2017

The model is struggling to make headway over the last week. The main drag on the portfolio is coming from 2 main sources, long GBPJPY and long USDCHF. Today the model also took a hit from a long USDJPY position. As shown above, the model has maintained those core positions. What is interesting this past week has been the higher correlation to the equity markets. Traditionally, we show a -2% correlation to the S&P500 Index.

Tonight as you break down the weighting of the portfolio, we have the most exposure to a long USD against the JPY. Let's see it that market has bottomed out yet.

For the day, the model dropped 28 bps leaving the year to date at +1.37% 

Positions and observations

Topic: Trading Notes

Model portfolio for Feb 3 2017:

The model moved from a short Yen to long Yen exposure for today's trading. The GBPJPY position reversed (again) yesterday and we saw the long position take losses. In addition, the USDCHF has stayed under downward pressure and cost the model in performance. The model is also flipping exposure in CAD related positions. Historically, this is a sign of the market in transition. We have seen the market trade the USD with bullish expectations with the new administration taking over power. The higher dollar story has been coming under pressure as seen by watch the DXY trade during this time. Below:

The Overlay Capital Trading Model is a once day signal generator, with indicators produced using the days full scope of trading activity. These reversal trades are indications that the market is poised to make a larger move than currently priced into volatility. It is our belief here at Overlay Capital in the strength of using daily rebalancing for managing your currency exposure.

On the day, the model lost 51 bps, and is now +1.47% for the year. 

Positions and observations

Topic: Trading Notes

Here is a view of the Portfolio for trade date Feb 2 2017:

GBPJPY had a strong rally and recovered a portion of the loss over the last couple of days. The Portfolio continues to trade from a long EURJPY net exposure. The long USDCHF has not looked good for the week, but it holds onto that position for another day. The long CAD has flipped and we see the trades coming from long AUD, EUR and USD against the short CAD.

FOMC became somewhat of a non-event. As expected and no mention of upcoming rate hike gave the market some stability. Tomorrow we get the BOE rate decision.

The first day in February gave the model an up 29 bps and that gets the year to date at 1.98% 

Trading Program Monthly P&L Histogram

Topic: Trading Review

Below is a histogram of the model's month returns for the period starting Jan 4 2012 through Jan 31 2017. The return for this month fell within 1 standard deviation. Our peak for the month was 3.10%. The chart will give you an idea of what the returns are expected to be, based on our extensive testing and research. Please feel free to reach out (info@overlaycapital.com) with any questions regarding the work we are doing.

 

Positions and observations

Topic: Trading Notes

Trading portfolio for Feb 1, 2017 is as follow:

The Aussie held the 200 day moving average on the downside and in turn generated longer term model signals to get long. Let's see how that plays out over the next few days. Our model is staying long AUDUSD. The damage was done for a second day with weaker GBPJPY. We continue to maintain a long exposure in that cross. The second culprit was the USDCHF sell-off. We continue to stay with the short CHF position against the USD. The largest net country risk is long EURJPY. This is a combination of crosses.

The model lost 57 bps on the last day of the month and will end the month of January at a decent +1.69%

We will follow this post with a more detail performance report which will include our hypothetical monthly return series.

Positions and observations

Topic: Trading Notes

Model Portfolio for Jan 31, 2017 trade date:

The long GBPJPY took at hit in the portfolio today. Given the strong JPY was the leader but our short EURJPY was unable to offset the loss. The AUDUSD, which was the currency to watch as the month end flow is expected to hit the market. As long as the 200 day moving average at .7491 holds early on. Just to add some drama to the pair, we have the ST Cross Signal indicating a close below .7560 will put some downward pressure on the pair. With this kind of force on either side of the market, I would expect the currency to move off the .75 handle. 

On the day, the model lost 54 bps, leaving the month to date at +2.26%

Positions and observations

Topic: Trading Notes

Portfolio view for trade date Jan 30, 2017

The model flipped the CAD exposure from long to short. Given the strong run in Canada over the past week, it makes sense on a visual of the chart. The AUD is long, and we have an eye on the month end 11am ET (4pm London) for anticipated buying of Aussie as the slow moving overlay programs run their models. GBP stays long and given the political situation the pound remains bid. You can see from the portfolio, there is almost no exposure to the USD. The short CHF position has not been in the money for a while. The position remains active so we will be watching for a breakout soon.

Friday, the model picked up 20bps leaving the month to date at +2.80%

The Trading Week Ahead - What to watch for

Topic: Market Commentary

We have a busy week ahead and not just from political actions and responses from all over the globe. You can't prepare for those types of events, but you can plan with respect to the allocation of capital from a risk perspective.

The known events are important enough. China activity will be centered around the New Year celebrations with a number of Asian countries. China will be closed for the week. On Tuesday, Japan will issue a statement on it's monetary policy decision and the ECBs Mario Draghi attends the joint conference with the European Commission. Also the FOMC begins its two-day meeting. Wednesday we get the policy statement from the FOMC meeting. The markets are not expected a hike this time around. On Thursday the Bank of England announces its decision on interest rates. Friday will see the release of January's non-farm payroll data, followed by the ISM non-manufacturing index.

We are waiting for the markets to open in order to execute the model signals. The portfolio for trade date Jan 30, 2017 will be posted later.

Beware "Basis" in the FX Forward Market - be aware of the choices you make to manage your currency risk

Topic: Market Commentary

An important article in the FX markets surfaced last week. It was written by Ulrich Leuchtmann from Commerzbank in their G10FX Research report this month.

The headline is " The FX Forward Market Is Broken". To summarize, the currency forward market, expressed in pips, represents the interest rate differential between the two countries. Since the financial crisis, there is no longer a way to come up with a fair calculation to reconcile the underlying yield expressed via the forward swap points. The street labels this a "violation of the covered interest parity", or "basis". Read the article for the complete math to back up this claim, it's worth the time.

Why do we care here at Overlay Capital, and why should anyone care? Well, the latest BIS Survey shows a large percentage of the daily FX volumes comes from the forward market. Clients who roll out hedges, or transact to a forward date are not getting a true yield measurement for that portion of their transaction. Overlay Capital run an active-adaptive overlay strategy, as well as a trading program that requires us to make decisions on the tenor for our rolls. We are conscious of the cost/gain from the roll portion of our strategy because it all backs into the return on the portfolio, and for some clients we need to back out the "yield" component. With this in mind, coupled with news reports around Bank fines for gouging clients on their FX rates, you start to wonder if this is a bank revenue-seeking plan to recapture spread revenue. I mean if you can't use a country yield to generate a fair value for the forward points, how would you ever truly verify the forward price as a reasonable rate? Add on the "cost of balance sheet" charges, your credit rating, and you end up with whatever number the bank wants to give you.

Overlay Capital spends time evaluating these hidden costs and is a believer in rolling your positions on a daily basis for our adaptive program. We have the option on the tenor we choose, but we build in the additional cost that forwards now come with. Our program (both the overlay and trading) lean towards the daily roll as we have an active strategy and will look to minimize the bid/offer spread impact. Understanding market structure is a critical part of our business as we stay focused on optimizing the tactical work around executions for the program.

Call or email for further conversations regarding these hidden land mines in the currency markets. 

New Reasons to Hedge Currency Risk - @Barrons article is missing the underlying flaw

Topic: Business Commentary

Another week, another mention in Barron's about the benefits in hedging your currency exposure.Crystal Kim, in the ETF Focus column highlights the rationale for thinking about currencies, with suggested products that manage the currency risk. It's the usual ETFs of note, the giant ($9. billion) HEDJ from WisdomTree and Deutsche Bank suite of currency hedged products. For the first time (for me), I see the IndexIQ suite of 50% hedged funds for investors who are currency-agnostic. Interestingly, here at Overlay Capital, we benchmark our currency program against a static 50% hedge.

My point in bringing up the article is the fact that they also mention the newest entrants in this hedged sector, the iShares Adaptive Currency Hedged MSCI EAFE (DEFA). The adaptive hedged fund has struggled to date to see AUM growth, and when measured against the static hedged product (HEFA) it doesn't show exciting results. In the past year: DEFA +12.6%, HEFA +14.8% and the unhedged EFA +13%. We at Overlay Capital find flaws in using this currency hedging process. It is very similar to WisdomTree's Dynamic Currency Hedged products, and like DEFA has struggled to raise AUM.

The "Adaptive" hedged currency methodology is found on the iShares website, and shows the factors used in calculating the hedge ratios. There are two major areas that we believe make these products weak. The first is the "well known currency indicators" used. They would be Carry (the compared yield per country), momentum (longer term moving average crossover rules), fundamentals and volatility. The carry and momentum are the problems, and probably why most investors continue to think that these are the holy grail in determining the future direction of currency movement. The second weakness is the fact that these hedges are calculated and applied (adjusting hedge amounts) on a monthly basis.

It is Overlay Capital's belief, that the market dynamics have evolved from the early 90's when these FX indicators surfaced, and were applied to long term investors. Today's focus on ETFs, highlight the fact that investment flows are built for the shorter term, and need to have the flexibility to re-price the ETF components. This brings the two major flaws into account, and leads to a weak product/s. Carry trades are like running a short volatility strategy. You make what appear to be low, steady income off the interest rate differentials and then it blows up. The interest rate differentials are set to attract or deter capital flows for the most part. Yes, there are internal reasons that a country will move rates, but that is not as important in my view. It's the problem with the fixed income world trying to build passive index product that load up on the wrong type of bonds. The higher the debt load forces the index to buy more of them. The momentum issue is too slow of a signal. Plus, the street knows the moving averages and can get set up to participate in "front running" these hedge trades. That leads to the final area of the overall dysfunction. That is waiting to see where these factors calculate on the last day of the month. It has nothing to do with any type of timing around market events. It's a random day from a market activity flow. The time of the flow, 11am ET (4pm London) is another controversial issue that will be covered in a separate blog. Then, these flows are part of an outright trade for 1 month. Again, there are multiple issues here around the current state of the FX forward market that is only now coming to light. Issues including the fact that the forward market is technically broken, and no longer represents an interest rate differential between the countries. Again, this is for a separate blog, and I think one of the most interesting and problematic areas in the FX market that very few people are discussing. End result is that the Banks quoting the forwards have a lot more room to "pad" the price with a standard response and rationale for it.

In summary, the new world needs to look at FX overlay, from a brand new perspective. I encourage you to reach out to info@overlaycapital.com for the methodology we have designed to give clients a much more flexible and dynamic approach to managing your currency exposures, and something ETF issuers need to explore along with anyone that has international exposure.

Positions and observations

Topic: Trading Notes

Portfolio for trade date Jan 27, 2016:

AS you can see above, the model has turned the AUD short exposure to a long position. The USD has netted down to neutral weight. The long Yen position that caused the model a down day, has been negated. We remain short CHF and long CAD. The EUR, through a number of crosses is now net long. The GBP has a short exposure, mostly via a short GBPJPY position.

The AUD turn by the model is very interesting, and will continue to attract attention as we approach month-end this coming Tuesday. A number of older overlay managers continue to operate under on a month to month basis. Their flows will hit the market at 4 pm London time, 11am here in NY. The WM/Reuters fix will get this flow. The window the Banks run a TWAP is 2 minutes before and after the fixing time. Further details will come in a separate post that describes the history of this fix. For now, keep an eye on Aussie over the next couple of days. Key support sits at .7498, the 200 day ma. Today's action saw the AUD drift lower. The model was short all day, as mentioned above got a surprising (to me) reversal at the close.

On the day, the model lost 27bps, leaving the month to date performance at +2.60%.  

Assessing the Model Portfolio intraday

Topic: Trading Review

Looking at the Model Portfolio this am (6am) I see it is down 20bps since last nights close. Primary driver in the loss is our exposure to long Yen, as USDJPY has caught a bid and is trading 100 pips higher. The approach we at Overlay Capital follow is to focus on the portfolio, and always question to see if there are surprise events in the market that has blindsided a component/s inside the portfolio. If not, we wait and watch the model's performance at the end of the day, and given those new inputs, we watch to see the impact to the mix of currencies within. Our goal is to stick to the plan.

On top of this model, Overlay Capital manages the "Risk" capital within the trading program. We believe the model has a predictive nature over the long term, and we recognize that there will be tests at both sides (positive and negative performance) during the day. It is important to note the difference between the Trading Program and the Overlay Service we offer. Overlay Services have a fixed set of parameters that prohibit intraday involvement, outside of monitoring the credit supporting the program. Within the Trading Program, we have a Risk management process that will adjust 'position amount' of the units (strength of signal measurement). We have trigger levels that will "take profit" by cutting the 'position amount' when the portfolio has a set % gain, and will trigger an increase in 'position amount' when the portfolio has a set % loss. We built the program this way to take advantage of the low drawdown/ low leverage style of trading a low correlation portfolio of currency pairs that employs 'Triangulation'. It is important to note that we define triangulation in FX terms, not as a trigonometric operation, where we potentially have a long AUD against USD and short AUD against CAD. The AUD positions are offset, reducing the portfolios risk. The model manages the 2 pairs independent of each other, and will recognize which side is wrong, opening the side that the model has determined will provide a positive outcome. The Risk Management process uses a consistent 'position amount' across the portfolio to allow the 'Triangulation' work in it's purest sense.

This mornings NAV drop of 20bps will not trigger an event. I continue to believe that the AUDUSD is the currency to watch today, and until we hit month end next Tuesday. If the AUD can't hold it's gains for the month, and drifts back below the 200 day ma, we may see some of the spec accounts that have gone long be forced to liquidate. Keep in mind the model does not care what day of the month, or what/ how the specs are thinking, but is aware of the trigger levels that may cause dramatic moves.

Positions and observations

Topic: Trading Notes

Trading Portfolio going into trade date Jan 26, 2017

 

The model lost a little ground during the day as GBP continued to strengthen against the USD and other pairs. As you can see in the portfolio above, we maintain our short GBP and CHF exposure and increased the short AUD. We have no USD position.

The AUDUSD is going to be interesting as we get to month end. The overlay managers that use monthly model signals to shift exposures is positioned to get a buy Aussie signal next week. Since our models are holding a short position, it will be interesting to see if AUD comes under some selling pressure as we go into the end of the week. If the market can't hold these levels (key 200 day ma at .7498), the month end funds will not have to buy. Our models are designed to read and react to daily data, giving it plenty of opportunities throughout the month. 

On the day, the model gave back 23bps, giving it a month to date return of 2.87%.

Positions and observations

Topic: Trading Notes

Trading Portfolio for trade date Jan 25, 2017

As you can see above, the model has flipped the GBP position around and is now short. The model withstood the large move in sterling after the Supreme Court ruled the Government need to get Parliament approval before evoking Article 50. Market pushed cable higher on the initial news, then very quickly sold it down 100 pips before stabilizing. As North America came in, GBP was bid and there were sizable trades (buying) at the 11am fixing against a few currencies (mostly JPY). Our model turned the GBPJPY from long to short tonight, and the same action in EURGBP.

The CHF remains in a short position (long USD). It continues to oscillate around parity. This pair looks ready to make a move.

On the day the model was up 52 bps, moving the month to date to +3.10%

Positions and observations

Topic: Trading Notes

Positions going into trade date Jan 24, 2017:

The long GBP exposure turned out well with strong Sterling rally against all crosses. We were down on the short CHF long USD trade, and the AUD had a small rally where we are short. Tonights portfolio looks similar as we remain long of GBP despite it's surge. We remain with the short AUD and CHF against the USD. Our long USD net has grown so it appears the model will be looking for bullish dollar moves (except against GBP!).

Today the model had a gain of 18bps, putting the month to date at +2.58%

Positions and observations

Topic: Trading Notes

Starting the new week as we started last Sunday at the opening. We were able to execute all model signals except a sell EURJPY and EURAUD at the close Friday. Both opened up this evening lower. The EURAUD had a little pop from lows and we were able to get into the short trade. The EURJPY, like last week, came under early pressure and we had to execute lower than hoped, which moves us a little from the Index.

Positions (and strength of trade, reflected in the unit column) going into trade day Jan 23rd are as follows:

The largest exposure is short EUR long GBP, with a net long USD position in the portfolio.

President Trump has started the first 100 days with some bold statements. Probably the biggest impact for the currency markets is his early stance on trade, and basically renegotiating all existing pacts. Given the European elections in the Netherlands and then France are fast approaching, we have all the makings for an uptick in volatility that may not be fully captured on a close to close basis. The statements from the new President can surface without warning, 

Friday the model gave back 28bps, leaving the month to date at +2.40%

Positions and observations

Topic: Trading Notes

Trading positions going into trade date Jan 20, 2017 as follows:

The model eliminated all CAD positions and we see an increase in the long GBP exposure. We are picking up internal bullish signals in the GBP so we will see how the news around Brexit unfolds. Today we had PM May layout the process at Davos, and GBP held it's own. It will be interesting to see where the model is positioned going into the weekend. Let's see if we get a Friday short squeeze and then see if we liquidate the longs. A number of non UK Banks are installing plans to reduce staff in London, and moving them to the Continent. The fundamental/political back drop for the Pound is looking a little dodgy.

The model remains short AUD and short Yen with a core long US dollar exposure as you can see in the portfolio above.

The model had a successful day picking up 38bps, leaving the month to date performance +2.68%.

Positions and observations

Topic: Trading Review

Positions for Jan 19 2017 trade date are:

As you can see from the portfolio, we maintain a long exposure to GBP (short EURGBP and long GBPJPY), but the net dollar exposure has gone decidedly long of US dollars.

The model has also flipped its exposure in CAD, going from long to short now. We remain short AUD and we have a net short JPY exposure against USD, EUR and GBP.

For the day, we lost 30 bps leaving our month to date +2.30%

Positions and observations

Topic: Trading Review

Strong statements from Theresa May boosted the pound and President Elect Trump talking the dollar lower gave the trading model and it's net short USD, a lift earlier in the day. That triggered some take profit signals at 7am ET, and helped the portfolio have it's strongest day of the year.

New model positions as of todays close are as follows:

We finally got to a square position in EURJPY, after getting reversal signals for the past 4 trading days. The VHF indicator is flashing a warning signal, and predicting a move. Direction uncertain as we failed to get a signal for that pair. The model remains with a long exposure to CAD and GBP, and short CHF, EUR, JPY and AUD, with USD neutral.

For the day the model was up 150 bps, leaving the month to date performance at +2.60%

Mid day update on Program strategy

Topic: Trading Notes

May's Brexit comments and tweet from Trump re question value in dollar strength has pushed the trading model up over 1% on the day, and that has triggered an automated reduction in risk signal. Positions are cut in half, and we will wait for an opportunity to either reestablish positions on a pre-defined level (as with TP trigger, we will monitor the portfolio to get back into full investment).

These rules are part of the Trading Program Risk Management procedures.

Positions and observations

Topic: Trading Review

Positions for Jan 17, 2017

I added a unit value to highlight the strength to the positions.

With net long GBP and short JPY, the model is not positioned for a "risk off" trading day. There is a hedge with the long CHF in the portfolio.

The model saw decent size P&L swings for the day and is generating an internal review, to develop our risk management process to look to actively manage the portfolio positions intra-day.

For the day, the model ended down 10bps, and is now +1.05% for the month.

Watch items that should impact currencies tonight/tomorrow

Topic: Market Commentary

First we have Australian Home Loan Report later this evening. Not what you would assume to be headline grabbing stuff but it will become if there is a deterioration in the housing data. Market has a close eye on any indication that the housing market bubble is popping. AUD historically can make dramatic moves. Our model signal at the close shows us covering our short AUDUSD position, turning our AUDCAD short to long and getting a new short EUR long AUD signals. We are going into the news with long AUD exposure.

Theresa May will add some more color to GB role with Brexit strategy. Hard to imagine anything but negative GBP reaction, but our signals suggest a bullish GBP outcome. Model stays short EURGBP, and has gone long small GBP against USD and maxed out on long GBPJPY. Like all good models, it removes the emotional bias!

Is 50% the right Benchmark for Measuring Currency Exposure?

Topic: Market Commentary

We at Overlay Capital have spent time working with clients to try and raise the level of awareness around choosing a smart way to measure the underlying risk with respect to their international exposure. There are strong opinions that state you should hedge 100% of your known currency risk, and others that say the currency is an operational process that requires a transaction when needed, or, it's built into the asset owned, leading to a zero-sum impact and no need to hedge. It is our belief, that a process designed to understand the risk, and manage the exposure in a systematic way can provide clients with an opportunity to generate stability with potential for additional revenue.

There are many studies done over the years to establish a true benchmark for measuring decisions made when users of currencies actively decide on whether to hedge or not. At Overlay Capital, we work with our clients to develop levels of comfort around what portion of their exposure they want to lock-in, and what portion they are comfortable exposing to a defined adaptive strategies that uses a number of technical and fundamental inputs, coupled with machine learning framework to manage a given set of foreign exchange positions. We are comfortable measuring our adaptive model signal performance against an accepted industry standard of the performance of a 50% hedge on this same position.   

Positions and observations - weekend

Topic: Trading Notes

Positions:

GBP opened Sunday night down 1.5% against the USD and JPY with over 1% lower against the EUR. Our model is long EURGBP so we had a negative start at the opening. We offset some of the losses with a smaller short GBP against the USD.

One of the biggest challenges for an end of day trading model is timing the executions during the most effective time of day. The model Index is based on the 5PM ET closing value, and our executions are measured against that. We have held our own to start the year as we develop a rule set around executions. Friday we deployed our end of week rule to address a reversal signal. Since markets are closed when we get our close signals, we have our early model run give us an idea on new positions at 3pm. We were able to zero out our long EURJPY position when we sum it was turning from long to short. Sunday night we still had to execute the short side of the trade. Given the 50 pip drop at open, we had to scramble to establish the short position. We feel our rule was effective.

This am our program has positive performance which is a very nice turn after a tough start.   

Positions and Observations

Topic: Trading Notes

Trading Positions:

For the second day in a row, we saw the EURJPY switch positions. This time we go from short to long. The two largest exposures on a net basis is short CAD and JPY. Looking at the price activity, I would be hard pressed to "like" the positions. That's the beauty of a model driven Program, it removes the emotions from trading.

We have added a 3pm run of the model to get an early look at what the positions will look like at the 5pm official close. This has been an interesting experience and we will creat some rules for execution around this work, and publish our detailed procedure manual.

Additional studies on market structure will follow in a seperate blog.

Trading performanve for trade date 1/12/2017 was +10 bps with the month now at +1.25%

Positions and observations

Topic: Trading Notes

Positions:

As you can see, our core model has turned it's EUR position (from long to short) through a sell EURJPY signal at last nights close, along with liquidating the long EUR against both CAD and AUD.

We saw the model go to square in many of the trades as it sold it's long AUD at a profit and long USDCHF at a loss. We don't usually see that.

It maintained a full long CAD against the USD and added more CAD via an increase to the short AUDCAD trade. The model is weighted towards a long CAD exposure.

The model picked up 5 bps yesterday, bringing the monthly return to +1.15%

Trading Program Positions and procedure update

Topic: Trading Review

We added the additional pre-close model signal service today buy we had a bug in the 5pm closing signal generator.

When we have no signals, the Program is designed to square up all trades. We will establish all model signals when process is ready.

For the day, the model was short GBPJPY and saw a drop of 1.8%. The long AUD against USD and CAD had a positive impact on the portfolio, as did the long CHF and EUR against the dollar. We had a small long GBPUSD and small long USDJPY that cost a little.

On the day the portfolio gained 0.45% for a month to date total of +1.10%

CNH roll rates for direction of spot thoughts, and impact to Bitcoin

Topic: Market Commentary

Looking at the USDCNH chart here at 1:15pm I see spot trading at 6.8750  Market tested the 50% retracement (6.8850) of the high from 6.9875 on the first trading day of the New Year, and the low at 6.7825 on Jan 5th.

Today's roll rate was 10% which signals a more aggressive tightness in cost to short dates for CNH. This looks like we may have a renewed push to the downside with a possible test of 6.7825 low last week. We may see that level break and expect to test the 6.7000 where we should find solid support.

Watching Bitcoins, we are already seeing the above scenario unfold with a push higher Friday and now we are back near the lows seen on Jan 5th.

Our models got a strong sell USDCNH signal at Friday's close at 6.8498. We have no position in CNH in the trading portfolio, but will be tracking how this signal works out. 

Trading Program Positions and update on execution process

Topic: Trading Notes

We had a number of signals from the Model at Friday's close. The executions took place at the Sunday open.

We will implement a new process around executing model signals going forward. Currently we run the models at the 5 pm (ET) close. We get our trades off before 6:30pm after studies indicated sharp moves just before 7 pm. We belive these sharp moves are the result of low liquidity in the FX markets as the west coast in the US are closing, and Asia is starting up.

The new process will generate preliminary signals between 3:00-3:30. We will get the executions done prior to the 5:00 market closes. We will continue to track the Model based on 5:00 closing data and measure our performance based on the execution rates.

We initiated long positions in EUR (small), AUD (full), GBP (small), CHF (full) and remain long CAD (full) against the USD.

We squared up the long EURGBP and short EURAUD positions.

We remain fully long AUDCAD and are building long USDJPY, EURJPY but just turned our long GBPJPY position from long to short.

Jan 6 2017 daily performance was +0.12%, up .65% for the month. 

Restrictive limitations inside dynamic currencies hedging products = poor performance

Topic: Market Commentary

The iShares' - Adaptive Currency Hedged" ETFs and WisdomTree's - Dynamic Currency Hedged funds attempt to protect U.S. investors from losing money on winning international stocks when they collect their foreign profits in pricier U.S. dollars. Neither of these products has been effective in generating AUM since inception.

I think the key issue that is limiting the growth of these products can be found in the following statement from James Wood-Collins, chief executive of Record Currency Management Ltd., which helped WisdomTree create the Dynamic indexes, "Adjusting hedges more frequently could raise transaction costs and pick up a lot of false signals from temporary currency fluctuations".

Today, currency overlay methodologies have not addressed poor execution procedures. Limiting the adjustment to the portfolio to a specific point in time, make it very easy for traders to set up the market against these simple strategies. Using month end prices to determine the hedge ratios allows traders to accurately predict the direction of these trades. This leads to sloppy fills which easily get passed on to investors. Future articles will describe how market participants can take advantage of these flows, and how new hedging methodologies from Overlay Capital are designed to manage FX exposure on a more controlled basis.  

 

 

FX Positions going into the final days of the year

Topic: Trading Notes

We see the EUR holding above parity as we drift through the final week of the season. Our model is holding a limit long EUR against USD position as the mean reversion signals outweigh the short trend. Maybe it's anticipating a short squeeze as we operate during the thinest trading seesions of the year.

The AUD and CAD hold some extreme position that currently are neutralizing any open exposure. This may explain the current state of commodities with oil trying to find further moves to the upside, helping CAD, and gold and silver struggling to rally off recent lows. - watch the AUDCAD cross (currently long) for key to next big move in these currencies.

Chinese foreign currency regulator easing controls

Topic: Market Commentary

Banks "can set exchange rates for the renminbi by themselves for customers based on market demand and price-setting ability," -the Chinese foreign currency regulator said in a statement. There continues to be a 2% band around the official daily rate, but this news will give rise to more volatility in the Chinese currency, opening the door for trading opportunities. This blog will offer clients guidelines to manage risk, and monitor prices to establish positions to take advantage of trading opportunities.

Hedge Funds loading up on "no brainer" trade!

Topic: default

There have been a number of reports of late highlighting the markets view that underlying slowing economy, leading to pressure in China's (inflated) equity market, will force Chinese leadership to weaken their currency. Some of the data used to support this limited analysis is the fact that China's reserves are in a "free-fall". That would be $4 trillion to under $3.5 trillion. These same bearish CNH (offshore) participants haven't captured the fact that these reserves have surged over the past couple of years, and that's the way markets should operate under CB methodology: accumulate when investors come in, and let the market have them back when they leave.

A controlled economy has oversight over both of these flows. If reserves weren't dropping then The PBoC should be accused of manipulation. I recommend, SAFE should write $100B worth of 6.80 strike USD calls at an aggressively implied vol level. If the spec accounts want to load up on an aggressive China short, then they can grab a decent amount of options at a low vol. China will sell reserves that they intend to sell if the currency weakens further, and get paid to do it. The Funds betting against them will have to take on sizable positions to get the currency to move.

Banks creating a straight pass through of risk

Topic: default

Large Banks continue to reduce trading staff and lose senior traders as they wind down currency risk exposure. They continue to quote clients but now find if safer to immediately lay off the risk into the street. Lawsuits and internal investigations surrounding allegations on traders ripping off customers and calling it trading revenue has exposed the FX industry! With the banks forced to off load all client flows, it will level the playing field and create opportunities for smart trading firms. We have done some interesting work that highlights the timing around the largest of these flows. Request further information from info@overlayfx.com on this study.

Enter your information below to receive our market commentaries and the company updates.

* indicates required