Letter to the Editor…
The other day I logged into my usual news and social media sites and had a chat box pop up on Facebook from my long-time best friends younger brother. He has recently joined me in the financial world, and took a job as consumer analytics with BoA last year. His question was pertaining to currencies, and as he knows I spend a fair bit of time in the forex markets he figured I might be his guy. However, I haven’t heard back from him since, so we’ll see if that’s a good thing or not. I figured I’d share the following as it got me thinking. For reference, every trade I take in any asset class (except for tangible commodities purchasing, like gold or silver bullion) is done strictly through technical analysis and charting. This method has worked well for me, and I make many of my trades public, including pending trades I haven’t taken yet. You are welcome to follow along and call me out on Twitter if you like, I’m @TraderSlim. In this case however, he asked a fundamental question not a technical one, so I thought I’d try to answer it as best I could. While I attempted to stick with the charts, it was hard for me to not get a little opinionated, but who among us doesn’t have that problem.
“So I’ve been following this renminbi saga for the last month or so. But I just don’t know enough about currency markets to understand wtf is actually going on. Thought mb you might be able to explain?”
My “lengthy” response…
OK, I’m going to try and answer the question in a vacuum, as in the way I approach my trading, devoid of major news events or fundamental analysis, and just focus solely on the charts, since you’re asking specifically about the currency and that’s where I make my “2nd job money”. First though, I’m sure you’re well aware of what’s going on in other aspects of the Chinese markets, with the HSCE off about 45% in the last 6 or 8 months. On a side note, I’d be a pretty aggressive buyer of some Chinese indexed funds when the HSCE hits about 7350, and I’m pending some shorts on the US markets this year as well. Realistically, I think the Chinese markets are entering stage 3 of the sell off, the manic stage. It’s becoming household news, and frankly I think the fall will be over in the next 6 months. If the manic phase ends up massive, then But that’s besides the point. See HSCE chart below.
Now, speaking specifically to the currency. Personally, I don’t trade the CNY (Yuan Renminbi) pairs b/c of how high the overnight roll is and being it’s a fairly new venture, it doesn’t have a lot of track record to base decisions off of. Finally, it’s China, and transparency is not their strong point, so it’s difficult for me to feel comfort in taking a trade in a currency/market so heavily manipulated (at least in the short direction) so I can’t speak much to it. Although given the agressiveness the Chinese government pursues good news, I think once the sell off is over, I would consider taking long positions.
I have a very biased opinion against financial news service providers so take the following with a grain of salt. As is true with most “financial news events,” the sell off in the currency hasn’t been as dramatic as fox news would want you to believe, and actually started about 3 years ago, January 2014. Frankly, being that it’s mainstream news now, I’d say it’s probably nearing the end, within the next 6 months or so. Since the CNY was partially de-pegged from the US Dollar, it’s made a run from 13 cents on the dollar to 16.50 cents, not exactly significant over an almost 10 year period. Actually I’d say that’s pretty slow and steady. That rise actually ended 3 years ago, and it’s been stair-stepping down since. Kind of like how bitcoin did a couple years ago, everyone blows their load on euphoria, and then it slowly trickles back to a more realistic level. Even using something simple like Fib levels, it’s only down to the .382, which is about the most conservative move down a correction can make. If it dropped all the way down to the .618 Fib level, it could still be heavily argued that the CNY is in a very long-term and very strong bull market (10/20/30 year timeframe, etc). So long story short, I think China has a little way to go on the down side, but is closer to being done than not. Don’t forget that China also owns more US Dollars than anyone, is the number 1 buyer and number 2 producer of gold in the world, and has a war chest that rivals many other nations combined (including ours). They have set up commodity pipelines with countries outside of the OPEC agreement, which takes money directly out of our hegemonic pockets. While dipping their toes the last couple years into the debt-driven system of the west to boost their balance sheet, they have not completely foregone the importance of tangible asset ownership, and brick and mortar is harder to burn than paper. Sorry for the diatribe.
This Got Me Thinking…
Well, a couple things come to mind.
First… shut up bobbleheads. But I’ve said that before. There’s only two possible reasons this has become so mainstream media. Either (a) they, as usual have to come up with something to fill the air 24 hours a day. Or (b), there’s a purposeful effort to shove the Chinese market down further, either to allow for better entry prices by the very, very small handful of people who actually know what to look for when buying equities. I guess technically there’s also the conspiratorial (c), which is simply, our government needs to remain top dog, and we have to sling mud at anyone that competes. Each of these can be further discussed but at the moment I’m not interested in taking the time to do so and honestly, if you’re reading this you probably already have your own opinions.
Second, why is this just now news? This one speaks for itself, and frankly falls in line with opinion (b) above.
Third, how can the “Chinese Miracle” so quickly become the “Chinese Disaster?” Five years ago China was widely heralded as an unstoppable freight train of economic expansion. Is this reminiscent of 2005 housing market in the US… anyone? How about any other “unstoppable market” in the history of… well, ever.
Fourth, since when did a correction that seems to be pleasantly bouncing the Fib levels be considered disaster? I play the .618 fib level regularly in currencies, we’re only halfway there.
All in all, if you’re a real trader or investor, you’ve put your years in, tested the water, burned your hand, taken your lashings, whatever metaphor fits your fancy (ok, sorry, I’ll stop), then you know that there is no such thing as bad news, just new opportunity. I hope this China disaster continues, for another 6 months or so, and perhaps the Chinese government reluctantly responds with additional measures of transparency as a token of good-will for the West. If so, I see dollar signs pending… and probably right about the time we see the US market take it’s much needed rest, followed by fall, followed by panic fall, followed by opportunity.