Critique My Trade

Guys,
I have been working on this trade. Obviously I would have to look at pricing on the puts. But what do you guys think of the logic for a macro strategy?


Trade: Short AUD/USD, Long AUD 10y IR Puts

Thesis: Long-term bearish AUD trend will continue after brief turnaround which offers ideal shorting opportunity. This view is predicated on slowing growth in China and Australia's close link to the chinese economy. Additionally, slowing growth in china and globally will reduce demand for oil and further negatively affect the valuation of the Aussie. Lastly, the view is predicated on the idea that China's recent rate cut will fail to stimulate the economy for two reasons: slowing global demand for goods and socio-political considerations which will weaken China's competitive edge (i.e. burgeoning middle class demanding higher wages). This slowing growth in China will in turn move the Reserve Bank of Australia to cut rates in an effort to stimulate their own economy, which explains the IR puts.

Time period: 6 Months, January '13 Calls

Comments (8)

Jul 9, 2012 - 7:55am
Riot, what's your opinion? Comment below:

Just to clarify: "Australian National Bank" is incorrect, it's called the Reserve Bank of Australia. I think you've gotten it confused with the "National Australia Bank" or NAB which is a Big Four bank here.

Jul 9, 2012 - 8:08am
dmackorth, what's your opinion? Comment below:

^^Thanks man.

Jul 9, 2012 - 8:55am
Macro Arbitrage, what's your opinion? Comment below:

Shorting AUD at this point is an extremely crowded, low sharpe ratio bet. The catalysts for rate cuts have taken place over the past 6 months and I fail to see the need for further rate cuts, or at least not by a significant amount. I too foresaw similar catalysts of an Asian slowdown, followed by RBA rate cuts and initiated the trade back in December 2011. Closed the position in May.

Jul 9, 2012 - 9:55am
dmackorth, what's your opinion? Comment below:

MacroArb:

Do you think this trade is okay from an understanding perspective? I.e. the trade would show that a intern is paying attention to how the markets work?

Jul 9, 2012 - 10:34am
tdr34, what's your opinion? Comment below:

You should also pay attention to how options on swaps work. For example, in this case you'd want to be long a receiver swaption.

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-30 Rock

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Jul 11, 2012 - 9:26pm
roberto424, what's your opinion? Comment below:
Revsly:
You should also pay attention to how options on swaps work. For example, in this case you'd want to be long a receiver swaption.

Ditto.

Best Response
Jul 11, 2012 - 10:21pm
Bondarb, what's your opinion? Comment below:

The idea behind the trade is fine (in fact I hope u had it on tonight b/c AUD just printed a disaster employment #) but you have some details that could use work...firstly u mention oil...Australia doesnt have oil they have metals and coal. Also, trading options on AUD rates is very difficult, they have a liquid futures and swaps market but not really a developed market for swaptions or options on rate futures. This may not matter to someone who isnt experienced in the market but if you are talking to someone who actually trades it they will know that. And if you are going to have a rate view, you need to know what you are betting on...the Aussie front-end has about 100bps of cuts priced into it. Do you think they will cut more then that? You need to understand the concept of forwards and what it means for a trade....ie just saying rates will go lower isnt enuff. Anything specific about the RBA that leads you to believe they will be more agressive? To really discuss a rate trade with someone who knows the market you also should learn the mechanics of the Aussie Bank Bill futures and the three and ten year futures....just saying "economy is bad, rates are going lower" is not really that outstanding. Ie how may futures will you buy and why? And also you dont say "puts on rates"...u buy a bond, receive in rate, or buy a receiver if u want to bet on lower rates.

other questions... -Most of the idea is centered around China, why not just receive Chinese rates?
-What do you think about positioning in AUD?

Jul 11, 2012 - 10:40pm
tdr34, what's your opinion? Comment below:

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Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
-30 Rock

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