September 2016 has seen one of the worst months in Arion’s history.
Actually percentage wise it was the worst month since inception and managed to beat January 2016 on the negative side. The month had been progressing well towards the end of the month until the BoJ (Japanese central bank) interest rate decision. The strategy didn’t react well to the announcements made by Mr. Kuroda. The losses experienced in Arion as a result of Mr. Kuroda’s comments didn’t come directly from any extreme JPY related currency movements right after BoJ interest rate announcement, but rather as a result of the post-announcement mixed reaction of the markets, that produced whipsaw like price action, trapping the strategy frequently on the wrong side of the JPY related trades. In fact the problem in case is the lack of BoJ credibility as seen by market participants, after the central bank as failed its own inflation targets of 2% after one and half year of the self-imposed deadline (the bank’s standard measure of inflation stood most recently at minus 0.5%) at the same time that Mr. Kuroda said the bank had set a new target for Japan’s consumer prices, disclosing that it expected to “overshoot” it’s existing price target of 2% consumer price rises, year over year. This inconsistency with official messages with what the reality has been showing send mixed signals to the markets who reacted in a close to chaotic fashion.-
The JPY trades (USD,JPY, EURJPY, GBPJPY) were liable for 112% of September’s losses, meaning that excluding JPY related pairs, the strategy was actually profitable in all the other trades performed during the month. We have to bear in mind though that both historically and also our backtests show that JPY pairs have been a real value contributor to the positive performance of the strategy.
At the date of writing of this post, we also already know that last weekend’s announcement by Theresa May (United Kingdom prime minister) about the deadline to invoke the article 50 as a result of the Brexit referendum opened a GBPUSD price gap over the weekend, which caught an ongoing GBPUSD trade off guard, imposing a negative start at the fist October’s trading tick . Normally our trades are closed over the weekend, but we can see some exceptions, which was this unfortunate case, since September had been already such a negative month.
We are revisiting our strategy settings and fine-tuning them, a process that is expected to be finished until the middle of the Month of October. The aim is to further minimize events as the ones experienced last month.
Having said this, we must also be aware that ups and downs are a normal feature of financial markets and that the loss experienced this month is no outlier, it will likely happen in the future and is well inside our model predictions and our long-term performance objectives.
Keep tuned, we are working our best to recover from this decline and we are confident within not so much time we’ll be back where we were last August.