Trading Desk Notes - May 13Submitted by Polar Futures Group on May 12th, 2017
Our thoughts on select markets as we wrap up the trading week.
The Canadian Dollar rallied ¾ of a cent Friday of last week (May 5) after hitting a 14 month low, moving in sync with June WTI which bounced $3 (6%) from a one year low. Home Capital was front page news and CAD had fallen 13 of the last 15 days while Canadian 2 year interest rates were at the biggest discount to American rates in over a year. Bearish sentiment had been getting extreme in both CAD and WTI and corrections were overdue. This week CAD was unable to add to last Friday’s gains...despite WTI moving about $2 higher as:
1) Moody’s hit the Canadian banks with a “rating downgrade,”
2)Trump lashed Canada/NAFTA (again) in an Economist magazine interview,
3) Iron ore prices were down 35% from February highs (the “China is slowing and will buy less commodities narrative”)
4) the BC election potentially weakened Canada’s trade position.
CAD hit a 13 year low at 68 cents in January 2016, rallied to 80 cents in May and has been trending lower ever since, currently down ~9% from year ago levels.
CAD positioning risk could spark volatile price action as the speculative short futures positions are at All Time Highs, which is understandable given the “bad news” and the extended downtrend but speculative long positions are also at historically high levels. This might mean that some investors think CAD is a “bargain” after falling 30% from 2011 highs. So net, speculators are short CAD, BUT...with historically big bets on both the long and short side of CAD a big move either up or down (a break of support or resistance levels) will mean a lot of speculators are going to be wrong. That position covering could lead to exacerbated price swings.
We still remain bearish CAD thinking it could fall below 70 cents this year, especially if WTI continues to fall. BUT we are well aware that “positioning risk” could work for us or against us, very quickly!
We remain bearish WTI, thinking that the $4.50 (10%) rally from last week’s lows to this week’s highs is only a correction in the ongoing downtrend. OPEC is meeting May 25 and the market fully expects an extension of the production “cutbacks” that were agreed to last November. WTI Positioning risk: we note that open interest in WTI has grown to new All Time Highs over the past 10 days (both bulls and bears have been increasing their bet size) and this could add to price volatility!
We initiated a small short Euro position late last week with the thinking that the market had fully priced a Macron win and that the generous 4 cent rally off the April lows could end(which took the Euro back to where it was before the Trump election). We think the EUR could "give back" the Macron bump as the historically speculative short position has almost closed out against the Euro over the past few months, setting up an opportunity for us to get short.
Low option volatility: There has been a lot of comment about the VIX being at historically low levels below 10% with some commentators suggesting/forecasting that this “level of complacency” is a sign that the stock market is “priced for perfection” and at risk of crashing. However, implied option volatility across nearly all markets is near record lows...stocks, interest rates, currencies, commodities. For instance, implied option volatility in the gold futures market is extremely low, at below 10%. The average IV for the past 10 years has been above 15% and when the gold market gets excited, the implied volatility easily goes north of 20%. What this low option volatility environment means to us is that options are “on sale.” If we’re thinking about taking a position in a market we will look at buying a call or a put rather than buying or selling a futures contract. Buying an option limits our risk to what we paid for the option while still giving us huge profit opportunity. So if the options are “on sale”, so much the better!