Dennis replied,
"Didn't teacher say before that no matter when, we must respect market trends? Currently, the GBP exchange rate's market trend has diverged from the news. Shouldn't this be the direction chosen by the combined force of market capital? And from all analyses... the probability of Brexit is indeed close to zero!"
"Close to zero, but not equal to zero."
Frederick said with a smile,
"I did say that we must always respect the market's choice, but I also said... herd mentality in the financial market is extremely dangerous. While respecting market choices, we must also learn to think independently."
"According to teacher's meaning..."
Dennis pondered for a moment and asked,
"Does teacher believe that the probability of 'Brexit' happening is not small?"
Frederick smiled and said,
"I didn't say that, but since the motion has passed and the public has the opportunity to decide the future fate of their country, then according to probability theory, the probability of 'Brexit' happening or not happening should both be 50%, not close to zero as you said.
Of course, my bearish view on the GBP exchange rate is not because of the 'UK referendum to leave the EU' itself.
In fact, no matter how this event develops later. Based on the current development status of the global economy and the expected economic development potential of major core countries. The EU economic circle, whether in terms of vitality or growth potential, is gradually declining in my analysis and forecast, and currently... shows no signs of recovery.
In other words, although EU countries have implemented many policies and measures to boost the economy in recent years. In reality, they have not escaped the long-tail effect of the 2008 financial crisis and have not actually resolved numerous internal conflicts of interest.
Starting from the fundamental situation... To judge with a deeper logic. What I am bearish on in the long term is not only the GBP exchange rate but also the EUR exchange rate. In terms of future economic development prospects and potential, the EU is far inferior to our US homeland, and also inferior to rapidly rising and fast-developing Hua Guo."
"Teacher is bearish on all European currencies?"
Dennis was somewhat surprised after hearing Frederick's words.
He paused and continued to ask,
"Then why didn't teacher have us prioritize shorting the EUR exchange rate, but instead chose to short the GBP exchange rate?"
Frederick said,
"Why choose to short the GBP exchange rate, this is a matter at the trading level. Because compared to the euro, the GBP exchange rate currently deviates more from fundamental expectations.
Coupled with the continuous short squeeze by various other funds and institutions after the entry of Chinese capital institutions, the GBP exchange rate has paradoxically reached a recent high, providing us with a better short-selling entry point.
Thus... this made me prioritize seeing the opportunity for excess returns on the GBP exchange rate."
"I see!"
Dennis suddenly realized, and then said,
"Then what is teacher's long-term expectation for the exchange rate trends of the pound and the euro?"
Frederick said,
"It's hard to say for the long term. After all, regarding the global economic development situation and market changes several years from now, even the smartest analysts on Wall Street would find it difficult to provide a specific quantitative analysis. We can only grasp the current market conditions based on existing fundamentals and macroscopic market trends."
"From your analysis perspective, teacher... Do you think CEO Su of 'Huayi Capital' is actually right?"
Dennis said.
Frederick said,
"Yes, and no."
"How so?"
Dennis asked, clearly a little puzzled.
Frederick said,
"I say yes because CEO Su of 'Huayi Capital' is right in his investment strategy of shorting the GBP exchange rate based on fundamental conditions, regarding the general direction of the GBP exchange rate trend. I say no because I believe CEO Su's entry point in trading, that is, his timing, is clearly problematic.
Before CEO Su intervened in the GBP exchange rate market. According to the previous trend of the GBP exchange rate, its trend had been falling for almost a year. In other words, in the GBP exchange rate range of 1.4500 to 1.5500, existing short positions in the market had a strong desire to cover.
Furthermore... due to the Fed's recent continuous dovish remarks and the domestic election factors in the second half of the year, the Fed had no motivation to change its current monetary policy and raise interest rates in the subsequent six months.
This made it difficult for our country's dollar currency to maintain a continuously strong exchange rate trend in the global foreign exchange financial market.
And the exchange rates of the pound and the euro are closely related to the trend of the dollar exchange rate. Ultimately, under these combined factors, the GBP exchange rate trend formed a consistent market synergy of short-term continuous upward movement.
If it were me... The correct operation should be, under the basic strategy of being bearish on the GBP exchange rate, to wait until the existing short positions in the market have almost covered, the long positions have continuously squeezed shorts to a certain psychological expectation, and the market news also has corresponding stimuli, before entering with heavy positions.
This way, it would not appear so passive, continuously squeezed by long positions, and fall into the desperate situation of being on the verge of liquidation."
"Then, teacher, when do you think is the most appropriate timing for this entry?"
Dennis asked again.
Frederick's gaze turned back to the GBP exchange rate chart, the sharpness in his eyes became keen again, and he said with a smile,
"It's now!"
"Now?"
Dennis's heart skipped a beat, and he stared blankly.
Frederick nodded and said,
"After the shift in long-short positions in the market during this period, the net long positions in the GBP exchange rate market have now reached nearly 300,000 lots. This indicates that most of the previous shorts in the market have completed their covering and closing.
Coupled with the 'UK referendum to leave the EU' motion being deliberated and passed by its cabinet. This means that the news stimulus has also formed.
At the same time, the GBP exchange rate, in the short term, quickly rebounded from around 1.4500 to near the 1.5200 mark, gaining more than 700 points. This has fully fulfilled the expectations of funds that went long below the 1.5000 point mark, giving many short-term long funds currently in floating profit a strong desire to realize profits and close positions for profit-taking.
Combining these factors, a preliminary judgment can be made. The collective force of long positions and the upward momentum that can be formed by the GBP exchange rate continuing to rise will only become weaker and weaker. Furthermore..."
Frederick paused here, pondered for a moment, and then continued,
"You just said that currently, major global investment institutions and numerous capital groups in the market, regarding the UK's Brexit event where the 'referendum to leave the EU' motion has been passed, widely predict the probability of Brexit to be zero. Such a consistent expectation, in my opinion, is also an extremely dangerous thing."
"An extremely dangerous thing?"
Dennis clearly did not understand Frederick's words.
Frederick nodded and continued,
"A universally consistent expectation means that if the outcome of this event is consistent with everyone's expectations, then its impact on market conditions will be very limited, and there will be no opportunities for abnormal returns.
Conversely, if the outcome of this event is contrary to everyone's expectations. Then, the impact of such a result on market trends will be quite drastic and extremely damaging, very likely forming another 'black swan' event.
Therefore, when betting on such an event. From a trading perspective, we cannot perform operations consistent with the expectations of the vast majority of market investors. Because with such operations, once expectations are met, it is difficult to achieve abnormal returns.
Instead, lightly taking positions contrary to the expectations of the vast majority, while controlling stop-losses, could potentially yield abnormal returns.
Therefore, whether from a purely trading perspective, or from a long-term fundamental analysis, or an analysis of the Fed's monetary policy intentions in the second half of the year.
At this stage, shorting the GBP exchange rate offers a better risk-reward ratio than going long on the GBP exchange rate."
"But teacher... Brexit, whether analyzed rationally or emotionally, should be an completely impossible event, right?
Firstly, other EU member states would definitely not allow it. An EU without the UK, would it still be the EU?
Furthermore, in all aspects, whether political, economic, cultural... the UK and the EU have formed a situation where 'you are in me, and I am in you.' How could it possibly disengage?"
Dennis said.
Frederick smiled at Dennis's skepticism, not minding it much, and responded with a smile,
"Before every 'black swan' event occurs, according to normal logical reasoning and everyone's perception, it is always considered an impossible event. The reason a 'black swan' is a 'black swan' is because its probability of occurrence is extremely small.
However, this extremely small probability should not be ignored by us. Because once such an extremely low-probability event, completely unexpected by everyone, occurs, its destructive power to a market with consistent expectations is quite astonishing.
Of course, often the occurrence of such events. While risks are ignited, enormous opportunities for huge profits are also hidden."
As Frederick spoke, Dennis carefully recalled the few 'black swan' events in the history of global financial markets over the past decade.
He had no choice but to agree with Frederick's viewpoint.
"Then teacher... according to your viewpoint and strategic guidelines..."
Dennis asked after pondering for a moment,
"Should we immediately, at this position, continue to follow and add to our short positions in the GBP exchange rate, increasing our short holdings?"
Frederick said,
"Continue to increase the number of short positions. This position already meets the heavy short-selling entry point I just mentioned."
"Alright!"
Dennis nodded.
Immediately, he composed himself and quickly instructed the trading team behind him to execute Frederick's trading orders.
As 'Aberdeen Asset Evolution No. 1' hedge fund product, managed by Frederick, significantly increased its short positions at this point.
The GBP exchange rate, which had strongly rebounded to near the 1.5200 mark.
Was once again sniped by short-selling forces.
Consequently, in the subsequent short trading period, the GBP exchange rate slowly pulled back downwards, maintaining itself in the range of 1.5160 to 1.5190 points, unable to effectively break through the 1.5200 point mark and further establish the aggressive momentum of continuous short squeezing by long positions.
Moreover, when the GBP exchange rate trend.
Changed from a continuous short-squeeze breakout pattern to a range-bound oscillation pattern.
At the same time, under the further fermentation of the news that the 'UK referendum to leave the EU' motion had been approved by the cabinet and spread throughout global markets.
Many retail investors and speculative funds that had previously followed the trend to go long.
With profits in hand, began to take profits and close positions, selling when the going was good.
And these long positions' profit-taking and closing further suppressed the GBP exchange rate's upward breakout momentum.
Resulting in the GBP exchange rate failing to truly re-establish itself above the 1.5200 mark by the close of the US market late on Friday, June 3rd.
Facing the GBP exchange rate, which had finally slowed its breakout trend.
All traders of 'Huayi Capital Chengyuan No. 1' hedge fund product, including Qu Zecai, who had finally welcomed the weekend break, let out a sigh of relief.
However, although the market closed, everyone's nerves briefly relaxed.
In the global financial market.
On online platforms where numerous domestic and foreign foreign exchange investor groups gather.
Regarding the trend of the GBP exchange rate, which had accumulated millions of long and short positions, bullish views and long sentiment still held the absolute upper hand.
Furthermore, comparing the long and short position data of various major institutions from last week, and even a few days ago.
It can be clearly seen that institutional groups like 'Huifeng Global Asset Management', 'Pacific Capital', 'Barclays Bank Foreign Exchange Trading Department', 'Navigator Capital', 'UBS International Capital', 'Nomura Bank Investment Department', 'BlackRock Global Asset Management Center Foreign Exchange Investment Department', 'Vanligo Hedge Fund'; 'Hashimoto Asset', 'Tianhe Capital'... still had an escalating trend of increasing long positions in the GBP exchange rate.
Regarding the continuously increasing number of long positions held by various institutions.
Su Yi remained relatively calm, but Qu Zecai was quite frightened when he saw this data.
"CEO Su, these powerful institutions are holding more and more long positions, which will increase our pressure to maintain positions. And looking at this situation, these counterparty institutions are clearly determined to use their capital advantage and significant market influence to guide the GBP exchange rate to continue breaking upwards, further forcing us to stop-loss and cut positions, or to be liquidated and exit!"
Qu Zecai said.
"It's fine, don't be afraid. Don't we still have about 500 million US dollars in usable cash? As long as we still have funds not yet committed to the battlefield, it won't be so easy for these institutions to go against the trend and use their capital advantage to guide the market and force us to liquidate.
Besides, there's plenty of smart money in the market, look... not all well-known institutions are going long, are they? Doesn't 'Aberdeen Asset Evolution No. 1' hedge fund product have short positions exceeding 20 million US dollars? This means we still have teammates."
Su Yi said.
"'Aberdeen Asset', this institution, actually took the main short position, I really didn't expect that,"
Qu Zecai said.
Su Yi smiled and responded,
"In the financial market, for an investment institution, the most fundamental factor in their choice of long or short investment strategy is the probability of obtaining abnormal profits within their self-awareness. After the 'UK referendum to leave the EU' motion was deliberated and passed by its cabinet, there will definitely be smart money speculating and entering to short.
This is not surprising. 'Aberdeen Asset's' 20 million US dollar short position is likely not the end, but the beginning, and... I predict that more smart large capital will join the ranks of the shorts later."
As Su Yi spoke these words, his eyes were extremely firm and confident, seemingly completely unconcerned about the fund account that had already lost 200 million US dollars.
Qu Zecai noticed Su Yi's demeanor and, without realizing it, was also influenced by him.
His confidence gradually grew stronger.
Su Yi thought for a moment and was about to continue discussing the subsequent trading strategy plan with Qu Zecai when his phone suddenly rang.
(End of chapter)