Chinese Yuan Hit And Leverage Lessons

By Adam Button

Not many people know what it feels like to lose a $20B fortune but Bill Hwang found out on Friday. His Archegos Capital blew up on Friday, wiping out the vast majority of a fund he built from $200m over 7 years and roiling the broader market. More on this below.

Meanwhile, CNH took a fresh hit today, with USD/CNH posting its 3rd biggest daily % gain in 6 months. The move spilled over to rapid selling in gold and silver.

XAU/USD is now attempting to hold above the trendline support from Mar. 8 low. This will be a short rading week in light of the Easter and Passover holidays. Good Friday Apr. 2 is a market holiday in the US but NOT a public holiday, which means markets will be shut, but the US jobs report will be released as normal. Below is Ashraf’s message made last Tuesday to the Whatsapp Broadcast Group, calling XAU/USD $1709.

XAU/USD Daily Chart

It’s rare for a fund that large to use leverage and the events of late last week demonstrated why. A handful of concentrated bets in Chinese and US companies were swamped by forced selling. Shares of ViacomCBS (NASDAQ:VIAC) fell 50% over two days, while Discovery (NASDAQ:DISCA) dropped 27% on Friday alone. Hwang was also behind heavy selling in Baidu (NASDAQ:BIDU) and Tencent.

There are some obvious risk management lessons here as one of the great traders of this era was ruined.

For the broader market, news of forced liquidation from a single fund is comforting. It means that nothing has changed in the bigger picture and given that the selling completed on Friday, there will be dip buying in those names. The broader market will also benefit as people pick up the scraps.

The market hates uncertainty and unknown sellers but once it gets a grip on what’s driving the selling, the mood quickly flips. There’s likely what happened as rumours about the selling began to percolate late on Friday, leading to a record close in the S&P 500.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by – long by +.

EUR +93K vs +90K prior

GBP +22K vs +29K prior

JPY -53K vs -39K prior

CHF +3K vs +5K prior

CAD +5K vs +10K prior

AUD +6K vs +8K prior

NZD +5K vs +6K prior

The big story in the past two weeks is the dramatic positioning shift in the yen as it shifted rapidly to a large net short position. The yen and Swiss franc are rapidly regaining their positions as funding currencies

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