The Daily Investor

Trailing Stop

Paul Tracy — Tue, 06 Jul 2010 02:27:32 +0000

What It Is:

A trailing stop is a special type of trade order where the stop-loss price is not set at a single, absolute dollar amount, but instead is set at a certain percentage or a certain dollar amount below the market price.

When the price goes up, it drags the trailing stop along with it, but when the price stops going up, the stop-loss price remains at the level it was dragged to.

A trailing stop is a way to automatically protect yourself from an investment’s downside while locking in the upside.

A trailing stop is sometime referred to as a trailing stop-loss.

How It Works/Example:

For example, you buy Company XYZ for $10. You decide that you don’t want to lose more than 5% on your investment, but you want to be able to take advantage of any price increases. You also don’t want to have to constantly monitor your trades to lock in gains.

You set a trailing stop on XYZ that orders your broker to automatically sell if the price dips more than 5% below the market price.

The benefits of the trailing stop are two-fold. First, if the stock moves against you, the trailing stop will trigger when XYZ hits $9.50, protecting you from futher downside.

But if the stock goes up to $20, the trigger price for the trailing stop comes up along with it. At a price of $20, the trailing stop will only trigger a sale if the stock drops below $19. This helps you lock in most of the gains from the stock’s rally.

In the example, you could also decide you don’t want to lose more than $2 on your $10 investment. If the stock goes up to $20, the trailing stop would drag along behind the price and only trigger if the stock falls to $18.

Why It Matters:

A trailing stop can be good for investors who may not have enough discipline to lock-in gains or cut losses. It removes some of the emotion from the trading process and offers some capital protection automatically.

There are some drawbacks to consider. First, you need to consider your trailing stop percentage or amount very carefully. If you’re investing in a particularly volatile stock, you could find the stop level triggered fairly frequently.

Second, frequent trading can have tax implications such as “wash sales” for stock held less than 30 days.

Finally, excessive trading can quickly turn into “churning,” with fees and commissions eating into your profits.

The T-Bill Mystery Solved?

Pierce Points — Tue, 06 Jul 2010 02:05:38 +0000

I mentioned a couple of weeks ago about some odd happenings in the T-Bill market.

Between June 1 and 14, yields on the four-week Treasury fell off a cliff. Diving from 0.15% to as low as 0.02%. An 87% decrease in a very short period of time.

Other short-term securities also saw yields plunge. The 13-week T-Bill dropped 56%. The 26-week bill fell 32%.

The upshot being that a lot of people suddenly started buying short-dated paper. Driving up the bid price and bringing down yields.

The question is, why?

After I sent out the original piece, Michael Schuss (who may be the only person I know tracking more data than I am) wrote in with an interesting explanation. Window dressing.

The timing of the buying in Treasuries corresponded with the end of the second quarter. Michael suggested that investment funds (and other like entities) might be selling losing investments and moving the money temporarily into T-Bills.

This is indeed common practice amongst funds. Managers are often required to report losses/gains on current holdings in the portfolio at the end of each quarter. If a stock, bond or other investment is showing a particularly egregious loss, funds sometimes sell it before quarter-end so as to avoid admitting just how far in the red they are.

This week, it appears as if Michael’s theory has some weight. As the chart above shows, yields on the 4-week bill leapt 325% between Monday and Wednesday. Now back to pre-sell off levels. Other bills have similarly rebounded.

Stock purchases completed on these dates would not settle for a few days. Putting them squarely into the third quarter. Thus, the rise in yields could correspond to funds cycling their money out of T-bills and back into riskier investments, now with 90 days until their next required reporting. The timing is striking.

The interesting thing is that this didn’t happen at the end of the first quarter. Was Q2 particularly rough for funds? Could this be a sign of more troubles emerging in the financial system?

Here’s to keeping it on the books,

Dave Forest
dforest@piercepoints.com

Note:

The information provided in this newsletter is based on the independent research of Dave Forest and Notela Resource Advisors Ltd. and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any securities or commodities named herein. Information contained in this newsletter is obtained from sources believed to be reliable, but is in no way assured. All materials and related graphics provided in this newsletter and any other materials which are referenced herein are provided “as is” without warranty of any kind, either express or implied. No assurance of any kind is implied or possible where projections of future conditions are attempted. Readers using the information contained herein are solely responsible for verifying the accuracy thereof and for their own actions and investment decisions. Neither Dave Forest nor Notela Resource Advisors Ltd., make any representations about the suitability of the information delivered in this newsletter or any other materials that are referenced herein for any purpose whatsoever. The information contained in this newsletter does not constitute investment advice and neither Dave Forest nor Notela Resource Advisors Ltd. are registered with any securities regulatory authority to provide investment advice. Readers are cautioned to consult with a qualified registered securities adviser prior to making any investment decisions. The information contained in this newsletter has not been reviewed or authorized by any of the companies mentioned herein.

How to Make Volatility Your Friend

Pierce Points — Mon, 05 Jul 2010 02:12:06 +0000

We’re living in an age of commodities volatility.

The last ten years have seen a number of big price swings for many natural resources. Uranium ran from $10 to $140, and then back to $40. Oil hit $145 then plummeted back to $35. Copper went from $4 to $1.25 and then back to $3.50 (and now back below $3).

As the saying goes, if you don’t like the price, wait five minutes.

These swings don’t go unnoticed. Especially by end users of these commodities.

Companies that use copper, oil, natural gas, nickel, phosphate, aluminum and a host of other commodities as inputs are faced with a challenge. How do you plan your project economics when costs keep pin wheeling?

One way is hedging. Lock in an acceptable price through the use of swaps, collars, futures, options and other derivatives. We are seeing more of this (particularly on the petroleum side).

But hedging requires a certain degree of sophistication, a staff dedicated to managing the hedge programs, and often comes with financial costs for executing these trades.

There is another solution. Integrate.

If you’re a steel-maker worried about iron ore prices, buy an iron ore mine. Now if iron ore prices rise, you pay the increase to yourself. Keeping profits high. And if prices plummet, the loses on the mining business can be made up by increased margins on steel.

This “hedging by ownership” is becoming a more common strategy as users recognize that commodities volatility is here to stay. This weekend, India’s Reliance Power announced it will merge with natural gas producer Reliance Natural Resources. Reliance Power is largely an end user of gas, managing a portfolio of gas-fired power plants across India. Buying Reliance Natural Resources gives the company assured access to (and guaranteed revenue from) natural gas supplies.

Of course, this deal is a little cozy as billionaire Anil Ambani owns both companies. And there are some other benefits to both companies in terms of streamlining government permitting. But the synergies in being both supplier and end user of a commodity certainly played into the deal.

We’ve also seen of late fertilizer companies getting into the natural gas exploration business in places like Canada and Chile. Many big oil companies are already integrated by owning producing wells and refineries. Steelmakers in Asia are buying coking coal and iron ore mines. Copper smelters are looking at funding porphyry exploration.

It’s interesting to think what might be next. How about aluminum companies investing in geothermal power? Nuclear power operators buying into uranium mines? (They got burned on this last cycle, so it might take awhile.) Housing developers getting into copper development?

Here’s to going vertical,

Dave Forest
dforest@piercepoints.com

Note:

Fireworks in the Markets 7/2/10

Matthew Bradbard — Fri, 02 Jul 2010 02:06:18 +0000

Very suitable fireworks in the markets as we celebrate our Independence. Be safe we will be back Tuesday…enjoy your long weekend. We feel oil could have another 3-4% downside at the most before we get a bounce higher. As we voiced in recent posts we expect the $70 level to act as solid support in August. If next weeks trade finds buyers we should have some bullish plays in September or October futures and options. Inside day in natural gas wiped out most of the previous days gains. Aggressive trades could have used today’s setback to buy as we will stay long with clients as long as $4.50 supports in August. Our featured play is call spreads in October with clients. From here we expect indices to bounce; we view this as a tradable bottom but nothing more. On a bounce to 1060-1070 in the S&P we will be shopping bearish plays for clients. October sugar was higher by 2.58% today’s closing at a six week high. On a run above 17 cents we see resistance at 17.45 followed by 18.35. If lucky enough to see that we advised clients to exit ALL remaining longs. On a settlement below 16 cents early next week our upside objectives would need to be reduced. December cotton closed lower all five sessions this week; our 74 cent objective is getting closer. Aggressive traders that are ok trading illiquid markets could lightly buy November lumber as an interim low is likely in. Though volumes were light yesterday could prove to be an interim top in Treasuries; on confirmation next week clients will be looking at NOB spreads (short 30-yr bonds/long 10-yr notes). Continue to accumulate longs in December live cattle. It was encouraging today in the metals to see little down side follow thru. Gold was slightly higher but unable to close above the 50 day MA. We will let the dust settle before making any calls. Trade lower was rejected in silver with prices closing just above the 100 day MA; in September at $17.83. We suggest buying silver as prices have come down 7.5% this week. Use set backs in corn, wheat and soybeans to be a buyer as we think the lows are in. Our favorite remains corn as we suggested clients to buy December next week on any retracement. As for currencies we have three ideas, long the Loonie, short the Yen and short the Swissie. For specifics do not hesitate to contact us.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Matthew Bradbard
MB Wealth Corp.
(954) 929-9898
(954) 929-9993 fax
matt@mbwealth.com
www.MBwealth.com

Please do not place any trade orders via email as they will not be executed.

Trading in commodity futures and options involves substantial risk of loss. Past performance is not indicative of future results.

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IB Interest Rate Brief

Andrew Wilkinson — Fri, 02 Jul 2010 01:45:38 +0000

Such has been this week’s market turmoil escalating fears over economic slow down and fanning talk about a double-dip recession, bond yields have already fallen to such levels that makes it hard to justify moving lower without severely weaker data. Friday’s June employment report carried a 9.5% headline rate of unemployment and failed to materially strengthen the case that the economy is moderating to a point worse than Federal Reserve members have already predicted. As such the dip in bond prices following the report offered a suggestion of surrender for the recent rally in yields.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis

Eurodollar futures – Such has been the abundance of what many believe to be bad economic news this week, ranging from declining consumer confidence and weaker factory output around the world, today’s reported 125,000 drop in jobs during June hurt the rush to lower yields. Investors can’t respond in an overly negative fashion from the more than expected loss of 125,000 jobs given the 83,000 increase in private sector jobs for the month while also poring over upward revisions to the previous couple of months. Fears that lower growth will curtail consumption in the second half of the year are always subject to the surprising vigor that consumers have showed during the recovery even when the rate of unemployment was running at a double-digit pace.

Also lost in today’s overall job loss was a deeper sense of the performance of the labor market. The net decline was largely caused by the end to 225,000 temporary positions created to conduct this year’s census. What next for these people and will they remain part of the labor pool? Manufacturing jobs continued to gain although at a slower pace than was predicted as 9,000 new hires were made, confirming the recent PMI data indicating a slowing in the pace of expansion. Of concern, however, is the loss of 117,000 service positions after a 420,000 rise. Confirming the less than wonderful health of the building trade, construction companies shed 22,000 positions in June.

Equity prices made a positive response after digesting the data, while the dollar remains weak. Treasury traders appeared to book profits and concluded that there was nothing so worrying about today’s report that justified pushing yields lower. The 10-year note future expiring in September dipped 10 ticks to yield 2.94% as Wall Street opened for business, while Eurodollar traders also appeared to bank easy gains from falling yields this week.

European bond markets – European bonds came to a calmer finish this week with peripheral bond yields narrowing relative to those of Germany. September bund prices are now trawling the lows of the session at 129.14 and continue to decline. The health of the financial sector is ever so slightly under less scrutiny after weeks of torment. Hard economic data showed producer prices in the Eurozone rose 3.1% year-on-year during May, while the unemployment rate slipped to 10% although remaining near the cycle high.

British gilt – The softer tone to bonds has gilt prices on the decline with the 10-year yield jumping by three basis points to 3.34%. That despite positive commentary on the fiscal health of government finances from Moody’s rating agency.

Japanese bonds – The recent rally in the yen has the potential to harm export profits but a more positive tone for risk appetite overnight helped relieve some of the strain on the yen, which in turn forced bond yields to increase by three pips to 1.083%.

Canadian bills – Bills rose ahead of the U.S. jobs report as investors continued to rely on gains in Eurodollars to erode confidence in the view that the Bank of Canada would push rates higher. Later, however, dealers had a rethink and pushed implied shorter-dated yields up by eight basis points. Bond prices were under light pressure with the 10-year government bond adding one basis point to stand at a yield of 3.07% maintaining a 13 basis point yield premium over U.S. notes.

Australian bills – Aussie 10-year yields rose a notch to 5.08% despite rising risk appetite overnight. Bill prices were lower sending yields a couple of basis points higher.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Andrew Wilkinson

Director of Media Communications

Interactive Brokers Group LLC

8 Greenwich Office Park, Greenwich, CT 06831

(203) 618 8085

IB FX Brief

Andrew Wilkinson — Fri, 02 Jul 2010 01:43:48 +0000

The burden of fear has once again been placed with such subtlety on the shoulders of the dollar that many investors have so far failed to notice it. So accustomed to bashing the euro on account of its weakening fiscal and financial health were they that dealers created a maelstrom of such proportion that they were all caught up in how impossible it might be to ever see it subside. But the dollar’s six-month break from being the whipping boy has come to an abrupt end as traders at the margin pack up their short positions with several arguing that the best near-term bet remains a bounce for a technically oversold euro. And back above a reading of $1.2500 the common question surrounding Europe is fast becoming “what crisis?”

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

Euro – Even ahead of Friday’s U.S. employment data the euro reached an intraday high of $1.2550 surpassing Thursday’s peak. European producer prices registered a marginal annual increase to 3.1% while Eurozone unemployment remained near its peak dipping slightly to a 10% rate in May data. Dealers are finding less fresh reasons to bear down on European financial institutions with much of a bad scenario already priced in. In mid-July the EU is due to reveal stress-tests performed around the region, which may shield the sector from further bruising. Against the yen the euro rose to ¥109.88 and today it also buys a higher 82.53 British pennies.

U.S. Dollar – Friday’s non-farm payroll report was expected to reflect the loss of temporary workers hired by the census bureau leading to a net decline of 130,000 jobs. Within the figure the private sector was expected to hire 110,000 jobs after a puny 41,000 jobs in May. In the event the headline rate of unemployment came in at 9.5% while the headline pace of job losses was 125,000 with the private sector creating a higher number at 83,000. Some 225,000 temporary workers lost their roles in June, while the report carried positive net upward revisions for April and May summing to 25,000 positions.

Aussie dollar – A breakthrough in discussions between Prime Minister Gillard and the mining community was announced overnight as the government compromised the scope of its fiscal reach. Rather than taxing all earnings at a 40% rate they have exempted most commodities and confined a 30% tax on earnings arising from iron ore and coal. The Aussie benefitted from Thursday’s slide in the greenback and comforted by the news on the super-tax recovered 2.75 cents. The decline in risk aversion overnight has allowed the Aussie to maintain gains but ahead of the U.S. data has drifted marginally lower to stand at 84.36 U.S. cents.

Canadian dollar –The Canadian dollar reached 94.68 U.S. cents overnight but has retracted to just 93.92 ahead of the employment data. Canadian labor data won’t appear until next week on account of the Independence Day holiday.

Japanese yen – A tapering off of risk aversion and the feeling that at least verbal currency intervention might occur at any moment saw the yen pull back from a surge against the dollar. Today it stands at ¥87.58 having reached ¥87.00 on Thursday.

British pound – The British pound felt a boost from a positive Moody’s report on its fiscal health, which served to drive another nail into the coffin bearing crisis. The report refers to Britain’s history of debt repayment stemming back to the 17^th century and termed today’s financial strength as “very high” as it lauded the integrity of the financial sector. The report hardly sounds as though it is a front-runner for any type of downgrade for Britain’s top credit rating and helped send the pound to $1.5216 ahead of today’s report.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

Andrew Wilkinson

Director of Media Communications

Interactive Brokers Group LLC

8 Greenwich Office Park, Greenwich, CT 06831

(203) 618 8085

Trailing Stop: Stock and Gold

Paul Tracy — Thu, 01 Jul 2010 02:29:00 +0000

A trailing stop order is a a kind of order that helps you limit the potential for loss due to drastic stock price fluctuations. This also helps investors get away from random emotion-based strategies. Research has shown that more disciplined trading is much less fraught with severe losses. One reason why using trailing stop is beneficial is that it does not permit your profits plunge below your set bottom-line. If you have chosen to invest in gold – one of the most reliable assets – you can rely on stop orders just as well.

Still wondering how it works? Very simple. For example, you are about to place an order to buy stock at $20 per share and you have set your trailing stop order at $2. Should stock price soar to $25, the stop order will follow it and will amount to $23. In a case whereby stock price drops to the stop level, the shares will be sold at the best available price. Once the stop point has reached a higher level following price growth, there is no turning back for it. Therefore, this is one of the most investor-oriented trading strategies. Should stock price drop below the stop order, you can withdraw immediately. An opportunity to avoid severe losses is the biggest advantage of the practice. You can limit your losses, but there is a much greater potential for gains.

Today, with world stock markets showing high volatility levels, many traders resort to investing in gold. However, stop orders have proven effective in saving incomes, so investing in shares does not involve serious risks either, which is very important in times of economic instability.

Another benefit is that it is a kind of cure against greed and fear, which often play against investors. No doubt, sketching your own plan means a lot in terms of creative thinking so crucial for successful trading; at the same time, not everyone has self-control. Many investors tend to get too excited to even stick to their own plans and begin to move frantically from one strategy to another. Trailing stop saves you the hard time and anxiety and guarantees stability. However, you’d better take your time and find a reliable stock and set the point at the right moment.

There are two most common ways of setting stop points. First, you can wait for the breakout of a prolonged consolidation (about a month or so) and put your stop points below the lower end of this consolidation. This method is used when there is a possibility of overvaluation; should the stock jump, investors will enjoy substantial income. The stop order is regulated continually along with stock price (or maybe gold price!) momentum; therefore, this technique is referred to as momentum-based or stop loss order technique.

The so called parabolic (stop and reverse) method is less likely to inflict the euphoria of a rapid increase in income. However, it is more preferred by discipline-oriented investors. What’s good about this method is an opportunity to immediately take up the opposite side of the market and go short, should the market momentum take the reverse direction.

Jobs # and then what… 7/1/10

Matthew Bradbard — Thu, 01 Jul 2010 01:38:38 +0000

What excuse will be given for a disappointing number tomorrow? Heading into a long weekend tomorrow’s jobs number will likely have a greater impact than normal. Crude oil has fulfilled our short term targets having dropped 8% in the last four sessions. We are not advocating longs yet but would suggest those short to trail stops down. The only way I would change my mind is if stock indices continue to falter. We do not expect August to close below $69/70. Natural gas was higher by 4.50% with some help from a smaller injection in today’s AGA report. We suggest long exposure in October via futures and option spreads as long as yesterday’s lows hold. With some help from Mother Nature via hurricanes and warmer temperatures we could see a trade above the June highs. Yes…we left our clients short ES position too early and lefty money on the table. Most of my followers realize by now we do not look for home runs and only look to get consistently on base. We believe equities have over shot to the downside and expect a bounce and will look to re-establish shorts for clients. At this time we are thinking a seller near 1070 and a target once short of 950 in the S&P. Impressive close in October sugar trading 1.37% higher on the day. Use a trade closer to 17 cents to exit remaining longs. Another down day in cotton but prices pared their losses. Trail down stops because if indices bounce we could see a temporary bounce in cotton. We still like having clients short December but maybe taking partial profits after the 4.5% depreciation in recent weeks. Did any listen and get long lumber…limit up today and an interim bottom likely is in. We will be exploring bearish plays in Treasuries again for clients in 10-yr notes and 30-yr bonds. At this point yields may be too low and prices too high. We advised clients to exit their short October lean hogs at a small profit expecting to sell again from higher ground. Continue to use the sideways action in live cattle to buy December. The 20 day MA gave way in August gold today and sellers overpowered the market with gold down nearly $50/ounce. Prices are below the 50 day MA for the first time since late March. We feel prices could drop another $25 -40 before we see buyers re-emerge. Silver prices were lower by nearly 5% trading back to the 100 day MA; a level that has held since mid-March. Some futures traders should have been stopped out when prices violated the 20 and 50 day MA’s. Though prices could come down another $1 we used today’s set back to buy some December call spreads for clients. In our opinion nothing has changed in metals, the breakdown today was likely caused by investors liquidating to cover margins elsewhere. Corn, wheat and soybeans were all higher today which is remarkable considered the weakness form outside markets. We continue to like bullish plays in corn and would advise investors to work long on setbacks. The US dollar got crushed today by 1.75% erasing the previous month’s gains. If this continues expect strength from all the European currencies. As for the three commodity currencies we would hold off either direction until next week. Aggressive traders who agree we could get a bounce in indices could look for bearish plays in the Yen.

Risk Disclosure: The risk of loss in trading commodity futures and options can be substantial. Past performance is no guarantee of future trading results.

Matthew Bradbard
MB Wealth Corp.
(954) 929-9898
(954) 929-9993 fax
matt@mbwealth.com
www.MBwealth.com

Please do not place any trade orders via email as they will not be executed.

Trading in commodity futures and options involves substantial risk of loss. Past performance is not indicative of future results.

IB Interest Rate Brief

Andrew Wilkinson — Thu, 01 Jul 2010 01:35:30 +0000

A weakening in the pace of manufacturing expansion in the U.S. confirmed a snapshot taken earlier in the day from other major economies. The rather ironic exception was within the Eurozone where the pace of factory output expansion stood still possibly reflecting the substantial devaluation of the euro this year. All told, conditions were ripe today for another pop-higher in bond prices creating lower yields. We have to look back to March 2009 to see when 10-year treasury yields last snook beneath 2.90%. The toll to be paid today, however, is with the U.S. dollar, which has suffered mightily at the hands of surges in the euro and yen. The inevitable rise in interest rates at the onset of recovery suddenly looks an awfully long way off.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/p.php?f=daily_analysis

European bond markets – The European money markets are altogether in a funny mood on Thursday. Today marks the repayment date for expiring one-year loans on behalf of Eurozone borrowers back to the ECB. Yesterday demand for three-month cash was relatively light while today’s offer of one-week cash was equally slim. All told, there appears to be a draining of liquidity from the system. But one has to remember that this is a demand driven problem and perhaps better phrased as a demand deficient situation. The perception remains that banks will have a hard time finding sufficient liquidity. Wary of lending to one another for fear that counterparties might disappear like ships into the night, dealers perceive higher cash rates are here to stay. Euribor futures sank 10 ticks – a huge intraday move for the contract and reflecting the possibility that the yield curve will steepen. Already the contract is making a comeback. September bunds are firmer after the U.S. ISM index with yields falling after an earlier snapback. The contract is trading in positive territory at 129.45 implying a yield of 2.56%.

Eurodollar futures – The spike in the September treasury note futures contract lifted the price to 123-01 following the weaker than expected out turn for the June ISM report. Eurodollar futures are mixed given that all contracts one-year forward from today reflect a three-month cash rate beneath 1%. Safe to say, the Fed is on hold as dealers wonder whether its “moderate” view of the economy is perhaps too optimistic.

British gilt – The U.K. version of the PMI manufacturing data showed an inline decline to 57.5 after a reading of 58.0 in May. Short sterling futures are off earlier lows associated with the tightening in European cash rates but still show a net loss of one tick on the day. September gilts are nevertheless 40 ticks better off at 121.45 to yield 3.32%.

Japanese bonds – The loss of confidence in the Chinese export recovery was evident today sending Japanese yields at the 10-year down to 1.049% with the September future adding 12 ticks to 141.78. The Chinese PMI for Jun read 52.1 after 53.9 with a reading above 50 indicating expansion.

Canadian bills –Markets are closed for Canadian Independence Day.

Australian bills – Aussie 10-year yields responded to weakness in Pacific equity markets and dropped one basis point to 5.068%. The 90-day bill contracts rallied by around five basis points following a dampened retail sales reading for May.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

Andrew Wilkinson

Director of Media Communications

Interactive Brokers Group LLC

8 Greenwich Office Park, Greenwich, CT 06831

(203) 618 8085

IB FX Brief

Andrew Wilkinson — Thu, 01 Jul 2010 01:28:31 +0000

The dollar index is off sharply this morning despite ongoing fears over the sustainability of the global economic recovery. Manufacturing data from Beijing to Frankfurt and London all encouraged investors to worry about the potential for a second recessionary wave. However, the key driving factor in the currency world appears to be the credit provisions agreed between Eurozone banks and the ECB. A rise in borrowing costs appears to be insulating the euro, which blasted well beyond its midweek peak and looks like it may well be making a beeline for $1.2400 and beyond.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

Euro – Sentiment was, however, earlier damaged by a Moody’s warning that lack of growth opportunities for Spain has given the ratings agent enough reason to put the nation on negative watch. Today the Spanish authorities successfully shifted all of the bonds it wanted to while the French also pulled off a successful auction. It seems that appetite for government debt remains alive and that fears for Eurozone sovereign risk maybe slimming at the margin.

Following Wednesday’s €131.9 billion three-month loan by the ECB, today it awarded a further €111.2 billion to banks applying for funding. Ultimately there has been a net liquidity drain – not caused by the ECB – driven rather by cash demand from the banks themselves. The effect on the short end of the yield curve has been to drive prices higher and this appears to be driving the euro to significant gains. It reached a high earlier at $1.2379 and it given the dynamic nature of the move, once again I conclude that shorts are having no fun in lucking for fast profits from the euro.

U.S. Dollar – The dollar index is lower by 0.95% at 85.26 even as global equity prices retract in response to continued evidence of a slowing manufacturing expansion around the globe. The June PMI in China softened from a 53.9 reading last month to 52.1. The PMI for the Eurozone did, however, come in as expected at 55.6 and unchanged on the May reading. Britain’s purchasing managers’ index came in at 57.5 and down from a 58.0 reading. Later this morning we’ll learn the PMI for the health of the U.S. but it will be tricky to decide whether a bad number will deter from the level of the dollar or whether it will bolster its demand from a risk aversion standpoint. Right now, risk aversion is not boosting the dollar as fears over the fiscally challenged Eurozone appear to soften. Data showing another rise in initial claims in the U.S. reminded investors that the trek to recovery remains a slog – claims rose 13,000 to 472,000. Friday brings the non-farm payroll data from which economists expect job losses of around 120,000.

Aussie dollar – Has the commodity dollar meltdown run its course? That’s the obvious question as equity prices wilt in the face of the PMI data while the U.S. dollar fails to make gains. Today the Aussie bottomed out early reaching 83.16 U.S. cents and as the euro rebounds, so does the Aussie, which last traded at 83.91 cents. Today’s weakness was the lowest level for the Aussie since June 10. Data for the domestic economy failed to provide much respite earlier, however. Building approvals were supposed to remain static in May data, but in the event suffered a 6.6% decline. Meanwhile retail sales data for May also dipped marginally to reflect a 0.2% gain over the previous month.

Canadian dollar – Having reached a three-week low the Canadian dollar has reversed course sharply this morning and for a risk-off day, the unit is on fire. The local dollar bought 94.50 U.S. cents recently having rallied from 93.63 cents earlier.

Japanese yen – Declines in Asian stocks inspired by the softening manufacturing stance in China is keeping a lid on optimism, raising pessimism on the outlook for export-driven economies. The yen is winning a fear-gauge battle with the dollar and today reached its strongest point since December. I’m sure the Japanese export sector will hardly be laughing about the dollar/yen rate of ¥87.71 this morning.

British pound – The British pound had suffered during the latest worries over global recovery. However, it has had quite some run-up lately rallying six cents from $1.4500 since mid-June buoyed by a strenuous budget yet without much of a growth threat. The last two days have seen its fortunes turn somewhat as dealers realize that the pound would be caught up in a global slowdown regardless of how well the Chancellor might have navigated his course for the British economy. The pound fell to $1.4873 earlier in response to some negative discussion for inflation from policymakers. David miles told the Daily Mail that inflation was “uncomfortably” high, but it certainly wasn’t time for a rate increase. His words echo those of another external member of the MPC. However, in a speech earlier in the week, BoE Markets Director, Paul Fisher told an audience that the two-year trajectory for the path of inflation is down and that it made no sense to tackle a presently high rate caused by a spike in food and energy costs. The pound rebounded following a sharp jolt higher for the euro and stands at $1.4973.

Andrew Wilkinson

Senior Market Analyst ibanalyst@interactivebrokers.com

Andrew Wilkinson

Director of Media Communications

Interactive Brokers Group LLC

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