Saturday, 28 November 2015

Dovish hike? Our panelists' thoughts on FX

18:17 Posted by The Thalesians (@thalesians) No comments

I have always been a firm believer that having discussions with other market participants is a powerful way to test your own views, both for discretionary and quant traders. Furthermore it can be an important way to understand how the market is positioned and to see how your views fit into that. As a result, over the past few years, we have organised several very lively macro panels at the Thalesians. They have been a great way to hear the views of many market experts. Furthermore, they've always been great fun.

Last Thursday, we had our latest macro panel at the Thalesians in London. I moderated an expert panel, which featured Eric Burroughs (Editor of FX Buzz - Reuters), Mark Cudmore (EM strategist - Bloomberg), Mick Grady (Multi-asset strategist & economist - Aviva), Ashraf Laidi (Strategist - Intermarket Strategy) and Jeremy Wilkinson-Smith (Independent). We touched on a number of different areas within macro markets, including the Fed, views on USD, as well as EM. We rounded off the discussion by hearing about the panellists' favourite views for the coming months in macro space.

I began the discussion by asking the panel's view on USD and the prospects of a Fed hike in December. The panel's view on the USD was perhaps more cautious than previous panels, where the view had been much more bullish. Among the panelists, there seemed to be near unanimous agreement that the Fed would hike in December. Cudmore suggested that the long USD trade is not over, however, he also believed the easy part of the USD trade is now over, and will be characterised by higher volatility. Wilkinson-Smith echoed this sentiment to some extent, noting that the risk reward is not there good for being long USD, with potential for squeezes on day of the Fed hike, especially given the possibility that the Fed would be conducting a "dovish hike".

Grady was more constructive on the dollar. Further ahead, he believed that the Fed is likely to hike more rapidly than what has been priced into the market, on the back of his more bullish view on the US economy. He also noted that his bullish USD view was helped by the Fed's policy divergence with both ECB and BoJ, which both remain in easing mode. In the short term, Burroughs suggested there was room for a short term covering rally in EUR/USD. He noted that one supporting reason was that the market was long gamma. However, following that, he could see a move back towards parity for EUR/USD. He agreed with Grady's view that the Fed could hike more than the market expected. Burroughs noted that the market is not prepared for further downside in EUR/USD, citing the median 12m forecast on Reuters is 1.05, and very few forecasting below parity, aside from Reuters' team forecast at 0.94 and a few other forecasters.

Laidi thought there was not much further downside in EUR/USD and over time spot could go higher. He suggested that the Fed would not hike in December, disagreeing with the rest of the panel. He was bearish on the US economy expecting the spectre of recession to return to the USA next year. Laidi also believed that USD strength would make it difficult for the Fed to hike. The panel broadly agreed that there wasn't much credence in the notion that the Fed would hike, purely to cut later. Wilkinson-Smith argued that if they really wanted to stimulate the economy, a more obvious path would be QE. There was also the question of the impact of the USD move as "tightening". Grady suggested that tightening due to USD strength, was equivalent to 2 to 3 rate hikes. The panel also discussed the potential reaction of equities on a Fed hike. Grady, thought that a hike would be welcomed by equities, given that it could be viewed as a vote of confidence.

On USD/JPY, there was consensus that we have already seen the high. Laidi suggested there could some downside in spot from here. Burroughs noted that the JPY is very weak on long term valuation metrics. He noted that the BoJ has been getting to limits of what more it can do. On Japanese equities, Grady was bullish, noting there was room for reallocation from retail, which was underweight.

Taking the discussion towards EM, Cudmore noted that the best performing currencies were INR, RUB and CHN (excluding ARS, which is much less liquid). Cudmore was bullish on INR, citing that it was growing strongly. He noted other opportunities in Asia, which remain comparatively cheap, such as PHP, also driven by strong growth. However, his view on EM, was not universally bullish. Notably he was bearish on ZAR and also BRL. Grady suggested that on EM, you need to pick your spots carefully. He agreed with Cudmore on the bearish BRL view citing massive current deficit and very high inflation, among other factors.

I ended the panel by asking what the panelists favourite views. Cudmore was bullish INR vs CAD. Grady saw upside in AUD/CAD, based on the differences in the non-commodity sectors, citing the green shoots in the Australian economy. Wilkinson-Smith suggested receiving AUD rates. He didn't see RBA hiking rates, with the state of their terms of trade. In FX space, he saw AUD/NOK downside, citing his constructive view on crude versus his bearishness on Australia's biggest commodities, such as iron and copper. Burroughs suggested being overweight PLN. Among Laidi's favourite views, was downside in GBP/AUD.

I hope to organise further Thalesians macro panels in the future, mostly likely in the spring. We hope to see you at the next panel!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

Saturday, 21 November 2015

Another year over

15:20 Posted by The Thalesians (@thalesians) No comments

So, this is Christmas
And what have you done?
Another year over
And a new one just begun - John Lennon

Time is jumping and skipping its way to that point of the year, when the current year fades into the past and the new year beckons us to the future. The lights of Christmas have begun to shine, sweeping up memories of the rest of the year in their wake. It is natural to ask, so, this is Christmas and what have you done this year?

A year might seem like a long time, before it starts. Yet, when the year is close to extinguishing, there is a realisation that it has passed quicker than you expected. The past is littered with the shadow of failure, or engraved with the glossy shine of success. The future is a place of promise unfulfilled or full of grand plans and ambition.

Whilst we should allow the conditions which allowed the past's successes to bloom into the future, it is unfortunately, all too easy to allow also the failures of the past to corrode the future, a vicious circle without an end.

A modicum of failure can however, be a necessity for success. If all you experience is success, it can lead to recklessness, a somewhat irrational view that whatever you do will be successful. A trader who has successful run, might feel somewhat infallible in the face of the market, and simply take too much risk, which magnifies his or her downside should the market turn against him or her, in an unexpected Black Swan event.

So when thinking about the coming year, treat it as canvas not yet sullied by the shadow of the past. The future is your time to shine, not to muse over what could have been, this year. Make use of the failures that have happened, and refashion them into lessons for success. And if you have indeed been successful, be cautious ahead. Just because there have been Black Swans in your past, there might well be a Golden Swan ahead!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

25 Nov - London - Panel - Macro Markets Discussion
26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming
14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

Sunday, 15 November 2015

A sunny life trading?

14:24 Posted by The Thalesians (@thalesians) No comments

Let me take a guess! You're sitting in America reading this? If you are, I hope you're not too far from a burger joint I'd like to visit one of these days! Well, it's probably a fairly good guess, given the Internet traffic that comes to this website, is mostly from US IP addresses. However, wherever you are sat in the world, you'll see the same article, the same text, the same photos in front of your eyes. True there might be a marginal delay in how quickly, the webpage reaches you because of where it is hosted, but that's about it.

First, there was world of mouth, then the printed word, then the telegraph, then the telephone and now all manner of electronic ways of communicating. News now travels quicker to their destination.
For markets, it opens up the question of where should I trade? Before you had to physically be near to an exchange. That is now irrelevant, you can collocate a server physically at an exchange and login from a different continent.

So from a technology point of view it seems irrelevant where you create a trading operation. You can choose a place that is more in keeping with how you want to live. No longer does it always have to be in London or New York, the traditional financial centres. It can be in warmer climes and indeed cheaper places to run a business, like in the photo above.

However, this ignores the point that trading is still very much a human operation, whether you trade in a more discretionary or systematic way. A quantitative trader is still a person at the end of the way, a person tapping away code into a computer to make it trade. They need to be recruited somehow. Where you are based will impact the pool of talent available to you. Some colleagues can of course work remotely. But even then, do you want every one of your traders to be working remotely? The flow of ideas can be aided by technology, be it through Skype and Twitter, as examples. Yet, this approach cannot fully dispense with human contact. I've worked remotely on client projects and it has been successful, but being able to sit down and have a chat about how a project is to be put together makes the process so much quicker and easier, even when compared to using Skype (and certainly when compared to using a phone or email).

When I've presented my work to a real audience, I get far more interaction than I do sending out work via email. It's obvious why: it's just easier to respond, when the person is sitting next to you. Furthermore, being able to gauge people's expressions as you are presenting, can be invaluable in allowing you to adjust your message (if they seem puzzled, it's your job as a presenter to fix that!)

In a bigger city, the number of random interactions you have can be exponentially more, than in a small city. One thing I consider is that whilst luck is an important in trading, the luck of meeting the "right" people is potentially the most important form. I've been lucky enough to work with very smart folks in banks, and after I started working full time at the Thalesians, I've tried to make an effort to keep going to industry events, whether it is conferences or more informal Meetup groups (including the Thalesians!) to keep in contact with the market. It's been an invaluable way to compliment the more "new" ways I try to stay in the "market's loop" like Twitter or LinkedIn. Ironically as useful as Twitter or LinkedIn have been, it's been as a way to meet people in real life (yes, the traditional way!), who are in markets. Finance Twitter has been a great resource, filled with many smart people!

So yes, technology might make it easier to trade wherever you want in the world. Indeed, a place which might work for one fund, might be totally inappropriate for another. But it hasn't totally dispensed with the need to keep on meeting people in real life. Life would be very boring indeed if our interactions were confined to only 140 characters on a computer screen. Now, I just need to find a place to trade, in the sun and next to a great burger joint... any ideas for where?

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

25 Nov - London - Panel - Macro Markets Discussion
26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming
14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)

Saturday, 7 November 2015

In Notts over Salford-ing the stream

17:02 Posted by The Thalesians (@thalesians) No comments

At the top of the English football pyramid sits the Premier League, with the likes of Chelsea and Manchester playing in front of tens of thousands of spectators, cheering (or jeering) as well known footballers ply their trade. Below, that, there's the Championship, League One and League Two, collectively known at the Football League.

Then we have National League System, consisting of semi-professional clubs, such as Salford City, below that. Salford City is in the Northern Premier League Premier Division. To get into League Two, they would have to first be promoted to Northern League North, and then have to win the National League. So if the Premier League were level 1, Salford City would currently be level 7.

Why am I talking about Salford City? Well, this week, Salford City managed to overcome Nott County, sitting 59 places above them in League Two in the first round of the FA Cup, quite an achievement! By any standards, there isn't a level playing field in football. Whilst, the Premiership might bask in vast sums of money, at Salford City's level, most of the players have other jobs. Whereas, players in the Premiership might change teams for millions of pounds, for Salford City, their recording signing, cost 5k! 

When it comes to markets, there has also never been a level playing field. Large institutions have a large amount of capital not only to invest in markets, but also to fund analysis of the markets and skilled traders to risk manage that risk. So should, we just give up, if we don't have their advantages?

No, because in fact in many other areas of the market, the gap has been closing because of technology and the greater availability of data! The growth of open source software, means for example it is far easier to analyse markets, without having to write all the code yourself. Take Quantopian's platform, which uses a Python based library zipline. All the nuts and bolts for downloading data and backtesting trading strategies are already there for you. It'll even trade in automated way for you. You can just spend your time on coming up with signals, rather than all the plumbing around it. I've written my own open source library PyThalesians for doing backtesting, and have used it for developing trading strategies myself. Whilst, I haven't open sourced the specific trading algos I use, pretty much everything else, I have open sourced. I've used a lot of open source libraries myself, to develop it such as pandas for manipulating time series and numpy for doing mathematical calculations.

So just like Salford City, facing big league competition, even if the playing field isn't quite level, it doesn't mean we should give up! Just means we have to work smarter, using open source software where we can, so we don't have to reinvent the wheel, so we can concentrate our efforts on building the trading strategies themselves, which of course will still require time. It's just about focusing your time where you can add the most value. There's always a rainbow somewhere, provided you can find it!

Like my writing? Have a look at my book Trading Thalesians - What the ancient world can teach us about trading today is on Palgrave Macmillan. You can order the book on Amazon. Drop me a message if you're interested in me writing something for you or creating a systematic trading strategy for you! Please also come to our regular finance talks in London, New York, Budapest, Prague, Frankfurt, Zurich & San Francisco - join our Meetup.com group for more details here (Thalesians calendar below)

14 Nov - New York - Thalesians/IAQF - Andrey Itkin - Efficient solution of structural default models
25 Nov - London - Panel - Macro Markets Discussion
26 Nov - Zurich - Thomas Schmelzer - Portfolio Optimization, Regression and Conic Programming
14 Dec - London - Matthew Dixon - Machine Learning in Trading (Thalesians Xmas Dinner)