2015.07.23 Daily

Although I see yesterday’s KRW appreciation would be the inflection point to turn around toward appreciation with the pattern of named hanging man candle, USD/KRW exchange rate turns to increase rapidly today as Korean GDP number was disappointed and USD was moderately strong against EUR last night. Discouraging GDP data led the bull bond market in line with continuous buying KTB futures by foreign investors. I expected the peak point of KRW against USD would be the range from 1,160 to 1,170 under monthly candle analysis, but today’s exchange rate is 1,165.1 won. As further, today’s candle type is the big positive candle which signals possible appreciation further and strong momentum toward higher. Maybe the level in FX market would somewhat meaningless, I feel. If I am a FX trader, I was short on USD/KRW and would loss-cut today and initially get the new position to be long on USD. But, the amount of position would be somewhat small because I’m a little bit skeptical about some arguments expecting to be depreciated toward 1,200 won soon. Nevertheless, the momentum to be high seems very strong now.

In Wall Street Journal, there are some interesting articles today. One is about Chinese bond market opened to specific foreign investors recently. The third largest bond market in the world was opened to oversee central banks and sovereign wealth funds, but they seem to hardly feel attractiveness about that. WSJ points four reasons. First, the history in Chinese bond market is very short. This market hasn’t been through the whole cycle from current easing cycle to unforeseen tightening cycle that could cause the credit crunch, so market participants feel some afraid about this. Second, the on-shore yield is lower than off-shore yield. Main investors including money managers already invested in off-shore market’s bond and if the expected yield of this is higher than on-shore’s, they do not need to buy on-shore bond. Third, turnover ratio is very low. WSJ compare this with US and Japanese bond market, but I do not agree with this, because Chinese financial market is developing and would be more liquid at all. And last, there are too many securities in Chinese bond market. Foreign investors feel some difficult to study and select good securities among them.

Another one is some hedge funds to prepare for a liquidity drought. They see a kind of bubble in junk bonds market because too many retail investors were in this market through many vehicles such as ETFs that could lead the rapid outflow of hot money if US Fed starts monetary tightening. So, they increase cash position in their portfolio, buy CDS premium on some junk bonds, and buy put option against some ETFs. I think they see the junk bonds market as the bubble. But, as think further, it would mean whole bond market bubble in line with recent woes about drain liquidity in the market. I think we would face the strong headwind from irrational monetary easing like QE as this printing money starts to play in anywhere and thus inflation arises soon. If then, bond market sell-off could be realized and we would be so painful. But, I hope this inflation would come with reflation, not with stagflation. The opportunity could come that pessimists, the majority in the world now, would be blown out of the world.