Apparently, all it takes...

Apparently, all it takes to get central banks out of the foreign exchange market is a good old-fashioned financial crisis. Sure, China still added more than $100 billion in Q3-and we don't know exactly how CIC is treated in this data- but the reserve growth from the emerging world, as proxied by the BRICs, clearly decelerated last quarter. Indeed, reserve growth in August plummeted by more than 50%, taking it all the way to its lowest level since....last October. Somehow, that lsit bit makes the decline seem not-so-impressive, doesn't it?
Of course, the data tell us more than just how many dollars Voldemort and pals bought last quarter. It also contains information about what the value of the constituent currencies did over the quarter. And as we know that the non-dollar currencies ended up appreciating against the buck, despite the sharp appreciation of the dollar versus European and carry currencies in August. From this, we can back out, with a few assumptions, how many euros the BRIC central banks had to purchase in the open market to maintain portfolio benchmarks.
As it turns out, Macro Man estimates that the BRICs banks only had to buy around €12 billion EUR/USD in Q3, the lowest level since Q4 2004. So it it seems as if he's complained less about Voldemort and chums over the past few weeks, it's not just because he now benefits from their nefarious market activities. They just haven't been as involved as they were in the recent past.

Q4 is shaping up a a differnt kettle of fish altogether, however; Russia has already bought in excess of $8 billion, reportedly, and Asian CBs, notably India and Singapore, have also been active. Plus ca change, plus c'est la meme chose...
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Corey
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October 15, 2007 at 1:40 PM ×

Gold trade update:

As of this morning's COMEX open, I've sold all of my Dec gold contracts. Although my target of $800+ by mid October was not reached, the rally since Aug 17 of over $114 was quite impressive. Historically, from a % perspective, 17.5% doesn't rank super high for the seasonally strong Aug-Oct period, but its still pretty meaningful. I do not believe Dec gold will push through $770-$780 without a multi-week correction taking gold back to at least $720 and possibly back to $700. The next phase of the bull run will be the largest and should push gold up $200-$300 from the next interim low. I'm looking for that rally to begin sometime around the end of Novemeber.

For my part, other than taking gold profits, I've been buying Yen vs. USD and selling US stock futures this morning...the next wave of selling equities should be swift and brutal.

Corey

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Macro Man
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October 15, 2007 at 3:52 PM ×

Thanks for the update, Corey. I am sticking with the gold for now...action in the dollar and carry trades suggest that the liquidity-based rationale for gold longs remains in place.

As for equities, I have been toying with slapping on some hedges. Just waiting for that Bob Barker moment- e.g., when the price is right.

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October 15, 2007 at 11:44 PM ×

Just curious M-M, what method do you use to decide your position sizes on things?

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Macro Man
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October 16, 2007 at 11:02 AM × This comment has been removed by the author.
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Macro Man
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October 16, 2007 at 11:06 AM ×

Bruce, the beta portion is sized to generate roughly 80% of the return of the Tremont Macro Hedge Fund index, if memory serves.

The alpha trades are sized based on a max-loss scenario: e.g., how confident am I, where would I get out, and how much am I prepared to risk on this trade? I can then calculate a face amount. So if the stop is 2% away and I am prepared to risk $400k on the trade, the face amount would be $20 million.

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