Macro FX Trading Q3 2017 Commentary
| Instruments traded: | FX Spot |
| Asset Classes: | FX |
| Investment Style: | Discretionary (non-systematic), Macro analysis, Technicals |
| Quarterly Return: | 7.50% (gross of service or any applicable performance fee) |
| Q3 2017 daily return volatility: | 1.00% |
| Average Trades per week: | 11.4 (since inception) |
Market Overview
In Q3 2017 bond and FX markets were shaped by Central Bank commentary/meetings, geopolitical events and the hawkish comments from Draghi. Moreover, at the Sintra ECB forum on June 27th, Draghi set the scene for the start of the quarter as he signalled a forthcoming taper of ECB QE later in the year. A multi decade high for the July business confidence index, IFO, and a general Risk On/Low volatility environment, aided a short and sharp rise in fixed income yields in Europe. This saw a delayed rally in EUR-CHF in late July and a steady move to 1.20 in EUR-USD by the time of Jackson Hole in late August, whereupon ranging set in for the rest of the quarter.
The calm for safe haven currencies JPY and CHF came to a halt after North Korea (NK) tested Intercontinental Ballistic Missiles (ICBMs) over the weekend of 10 August. Further events in NK alongside severe hurricanes and some softer data in the US, saw US yields (and European yields too in sympathy) reach a nadir in early September, hitting around 2.0 percent. The Sintra bond yield rally fully reversed thus USD-JPY reaching 107.50, USD-CHF 94.20 and the DX Dollar Index below 0.91.
The rest of September saw a decent rally in US yields with 2 year and 10 year Treasury yields gaining some 15 and 20 basis points respectively, on the back of hawkish Fed commentary and confirmation of Quantitative Tightening at the September Federal Open Market Committee (FOMC). Fed funds contracts moved from pricing hikes of around 5 basis points to around 17 basis points by the end of the quarter, increasing the value of the USD, with USD-JPY propelling back towards 113. EUR-USD slipped into a range and ended the quarter on a weaker note as Merkel works towards forming a Jamaica coalition.
GBP gained on stronger data then took off when a November hike was signalled at the Sep UK Monetary Policy Committee (MPC) meeting, moving from 0.92 EUR-GBP to sub 0.88 in short time.
Commodity currencies CAD, AUD were also active continuing their Q2 bull run following the anticipated Bank Of Canada rate hikes in July and September.
Portfolio Performance
| July | +11% |
| Aug | -2.6% |
| Sept | -0.6% |
The book had a strong July, having long EUR-USD and EUR-CHF. These positions made gains following a spike in Bund yields in the wake of Draghi s hawkish comments at the Sintra ECB forum. Choppy trading conditions ensued after the comments were eventually priced and the rally concluded with North Korean geopolitical concerns to the fore in August and September.
Outlook
In Q4 the standout policy events are the announcement of the Fed Chair (hawk or dove?), the October ECB meeting for QE policy guidance, the November MPC and the December FOMC where hikes are around 80 and 70 percent priced-in. In Politics, the passage of proposed US Tax Cuts will be key as will developments in Catalan, the German coalition, the Japanese election and the Party Conference in China.