A profit is never a profit until

YIELD DIFFERENTIALS - Not an easy currency market to get a handle on at the moment. The Euro continues to chop around and looks like it could break either way. The Pound remains locked in a multi-month uptrend, but is showing signs of stalling at critical longer-term resistance. The Yen has been yoyoing back and forth, while commodity bloc and emerging market currencies are relatively quiet. Some of the price action that offers a little more clarity is on the crosses, where it looks as though playing the major currencies against risk correlated FX could prove to be a formidable strategy over the medium-term. The story is all about yield differentials and I believe there is a significant risk for a narrowing of yield differentials back in favor of the major currencies as the more developed economies emerge from the depths of this prolonged economic downturn. I am also still looking for a long overdue corrective decline in US and global equity markets, and should we see this play out, this will only serve to further support the strategy highlighted above. I have chosen to exercise my view through short New Zealand Dollar and short S&P exposure, and will be looking for these two markets to underperform going forward.

A PROFIT IS NEVER A PROFIT UNTIL - Both of these markets have benefited greatly from an ultra low interest rate environment, and both of these markets would be quite vulnerable should market participants feel the time is right to realize some profits, with monetary policy expected to continue to reverse course and tighten up. In the case of the New Zealand Dollar, much of the appreciation in the currency has been driven off external factors (search for yield), and (in my opinion) has had very little to do with any positive developments on the domestic front. So with the currency trading at longer-term cyclical highs, and with many market participants having already taken full advantage, the timing for some profit taking is probably right. After all, a profit is never a profit until it is realized. If you have been long the New Zealand Dollar, and you are looking at a central bank that has been quite vocal about its concern over the strength of the currency, and if you are considering the possibility that the Fed might actually start to tighten up some more in the face of consistently strong local data, and if you think global equities are also elevated, perhaps taking profit wouldn't be the worst strategy. What good is 3% yield if the currency is overvalued and quite capable of a 5-10% correction?