CLEAR PATTERN - I am most grateful this year that I am a currency trader and I am most grateful that this has resulted in a small allocation of risk to the equity portfolio. Having said that, even with the small exposure, the setbacks have been notable and the price action in the US equity space has been front and center for the entire year. Sure, there have been other stories this year, Bitcoin being one of them. But as highlighted in the previous week, I don't believe the appreciation in Bitcoin is completely disconnected to what we've seen in stocks. I believe the Bitcoin market has found confidence in this environment we've been living in where investors can allocate capital to risk investment without any worry of downside risk.
THE HICCUP - Of course, this environment is a product of excessive monetary policy accommodation that has incentivized investors to do exactly this in an effort to create a sense all is well. And so when I look back at this year that was, I can not say I'm surprised and can not say I would have done anything different. The facts have not changed as far as I can tell and the ultimate result should be the same. As a reminder, it's true monetary policy normalization has not ushered in a capitulation in risk assets in 2017, but I believe this to be a function of accommodation from the US administration that has replaced the monetary policy drug, with it's own form of accommodation in tax reform. But this will have been all but priced in and out soon and then what do investors have to look forward to? That's right...not much.
IRRESPONSIBLE - Perhaps it sounds foolish for me to keep to this line, but it would be irresponsible to dismiss the fact that nothing has discouraged this outlook in any shape or form, with the outlook only intensifying after this year we have seen. All I can do is take shots and be responsible with my risk. Again, I am grateful I am an FX trader because of this, but I can't take the good without the bad. Remember, between 2014 to 2017, we had done exceptionally well playing the short side of equity market rallies. As I always say, the best short opportunities come in the most intense of uptrends. In 2017, the equity market has gotten the better of us because the rally has continued, but it has managed to do so in a way where it is breaking to record highs on a daily basis, but without that intensity behind it.
NOW AND AHEAD - This is what has contributed to the low vol, torturous price action we've seen, that has made the year all the more challenging. But to now say this is just the way it is and it will continue like this, is not anything backed in credibility, only ringing with a defeated attitude. As we head into 2018, we will see how the market responds to US protectionism, a further normalization of monetary policy and the risk of the return for something else that has been absent for so many years....the risk of inflation. On the FX side, we only hold the short USDJPY exposure. As far as this one goes, I love it and we'll just have to see. To me, the combination of 1) a market looking like it wants to roll back over to a range bottom that has been well defined in 2017, 2) a broad based negative sentiment for the US Dollar and 3) what should be at a very minimum, some form of a pullback in equities, are all USD bearish and are all suppotive of a lower USDJPY rate. I believe a retest of the 107.30 area 2017 low is a very realistic expectation in the weeks ahead.