The dollar chart is no longer parabolic. It’s vertical.

This by itself is not an indicator, that we have to close the long dollar trade. My general feeling is “Why give up on a good trend, while it lasts?”

On January 1st, 2015 I posted that I had reduced my short Yen risk and focused on short Euro. My relatively conservative risk commitment at the beginning of the year allowed me to build a short Swiss (long USDCHF), after the SNB surprise action had sent the currency into the opposite of freefall.

But now both EURUSD and USDCHF trades have moved enough to be considered mature along with USDJPY. 

Even the secular dollar bulls, who are calling for EUR to go back to 0.80 and JPY to 150, have to admit that more than half on the move has already taken place.

When EURUSD was at 1.35, it was easy for to say “I will stay short no matter what. If it goes a few % against me, I will just wait it out.” Now there is a lot to lose from 1.05.

So, are you prepared to sit on your short EUR position, if it goes back to say 1.15? Maybe you are. But it is not crazy for even the greatest dollar bulls to think of some risk management. For some it means reducing positions, for some trailing stops. Personally, I prefer the former.

As I am taking some profits on EUR and CHF, my thoughts are turning to currencies that haven’t moved quite as much and still have space to catch up in the devaluation race.

You might have guessed what part of the world I am thinking of from the picture upfront. China, Taiwan, Australia, New Zealand, Korea, and so on.

Australia in fact has already moved a lot as well. But New Zealand, as I have written before, looks very expensive against its larger neighbor. So I have recently decided to swallow the negative carry pill and establish a small NZDUSD short.

China is the focus of raging debates and what is actually going on there is beyond the scope of this post.

I would like to have a better look at South Korea, which delivered a surprise rate cut last week, confirming its participation in the race to the bottom.

Indeed KRW has weakened somewhat against the US dollar. But the 10% retreat to the highs is not that substantial. If you substitute USD by the currency of their closer neighbor - JPY, you will see a very different picture (lower number means stronger KRW).

So we have a theme similar with China and New Zealand: the carry is not great (though closer to zero in the case of Korea), looks weaker relative to USD, but strong relative to some key counterparties.

I have to confess, I am not at all an expert on Korean economy. 

Rather than to analyze specific countries, I want to focus on the general theme. How much downside is really there in being short USDNZD, long USDCNY and USDKRW? 

Yes you might have to eat some negative carry, but are you worried about catastrophic appreciation of any of those currencies?

So now that we have (hopefully) booked some profits on easy positive carry trend trades in EUR, JPY, and CHF; is it worth to pay some carry in places where the downside is not that big?

Extreme, even absurd-sounding scenarios. Don't feel foolish for including them in your reasoning. Sometimes one has to ponder the extremes to reach the utmost clarity.

The last week's Swiss Franc move reminded to us that no one is safe in the markets. I could gloat and say "Look at me: I was wrong way around, but I actually did well because of my good risk management and portfolio construction!"

But, rather I am saying "Whew..."

In the world of leveraged finance one may not honestly say "My portfolio cannot blow-up." Rather I would hear "My portfolio will not blow-up, unless U.S Government declares a full default... China goes to war with Japan... aliens invade..."

In the spirit of considering all scenarios, let's talk about the bond markets.

One of the arguments I heard recently from people who wanted to be short U.S. government bonds is "With 10-yr note yield sub 2%, how much more can they rally? The risk is skewed to the rate upside."

I take an issue with this approach. Let's consider the true extremes.

1. All rates going to infinity. An event approximated by full default or hyperinflation. All future cash flows become irrelevant. All bond prices, regardless of maturity, go to 0.

The downside for a par bond is 100 to 0. Regardless of coupon.

2. All rates go to 0. An event approximated by establishing gold standard and no term premium. All future cash flows have the same value as present cash. Every bond is worth it's face value plus all future coupon payments.

The upside of par 2-yr note with 0.5% coupon 100 to 101. Not much compared to the downside of 0.

However, the upside of 30yr par bond with 2.5% coupon is 100 to 100 + 2.5*30 = 175. Not so skewed, is it? 

Another way to think of it: if you have a zero-coupon bond trading at 50, the risk symmetric with respect to these two scenarios (0 with infinity rates, 100 with 0 rates).

This counterintuitive distribution of risk, has to do with "bond convexity". The convexity is caused by the fact that, as rates fall, the future gains and losses become more meaningful when discounted to the present. Thus those who bet on falling rates see the size of their position increase, as the market moves in their favor. The converse is true with betting on rising rates. These convexity effects increase dramatically as the maturity of the bond lengthens.

3. Rates go negative. Not possible, huh? Tell this to Euroland, Switzerland and Japan. So far the negative rates dominate only the portion of the yield curves within the 10yr mark and the convexity effects are subdued. But who can now deny the theoretical possibility of negative rates all across the curve?

Can future sovereign obligations become multi-fold more valuable, just by the virtue of being the future?

The U.S. Treasury curve seems in no such immediate danger. At least in nor much more danger than EURCHF floor was from being released.

However, the United States has a fundamental structural difference from European markets - the fixed prepayable mortgage market.

Imagine the prepayment and refinancing wave that would happen if the 30yr mortgages rates started to head towards 0. Below 0?

The mortgages originators will find themselves immensely short fixed income market and forced to keep buying, exarcurbating the move.

Now the dealers are not stupid (mostly), they are hedging (somewhat) not only their directional risk, but also the convexity. But are they really prepared for negative rates? The thing with derivatives: for every party there has to be a counterparty. So, no matter how you push the risk around, it remains in the system.

And when people are caught unprepared, things get funky. U.S. economy might not warrant negative rates, but can the runaway convexity move take us up there? Could we theoretically see bond futures rallying say, to 1000?

Those are not likely scenarios. And I am not saying that you cannot trade bonds on the short side. We are in the business of taking risk.

Global volatility shifted into overdrive Thursday following a surprise decision by the Swiss National Bank (SNB) to scrap its minimum exchange rate. The development led to massive moves in foreign exchange markets and European equities, helped by speculation that the SNB move may be a harbinger of the long awaited, much rumored, often delayed round of stimulus in the eurozone.

The action in U.S. markets was horrible, but what's new. After traipsing through all of 2014 without four straight down days in a row, this year has already witnessed two streaks of five down days in a row. The lack of coordinated bids in the major indexes takes your breath away. Where are the buyers?

Although the move by the Swiss central bankers may seem remote and unimportant to U.S. investors, nothing could be farther from the case. Understand that Swiss bankers are considered the gold standard of probity and good faith. The fact that these bankers pulled such a stunning move off without a prior hint is nothing short of mind-blowing, and has dealt a serious blow to the credibility of central bankers everywhere.

We always say that this is the central bankers' market. The Federal Reserve has called the tune since the start of quantitative easing, or "extraordinary measures," in late 2008, and its efforts have been synched up with the European Central Bank, Bank of Japan and Bank of England, as well as the smaller central banks worldwide. When all the central banks walked hand in hand in solidarity, the global financial system drew itself up out of the muck of the credit crisis and reestablished dignity, pride, a sense of joint purpose, forward progress, and currency peace.

But now we see the central banks going every which way as the solid wall of defense against an "every country for itself" mentality breaks down. The Federal Reserve has halted quantitative easing, the Japanese are wavering, the eurozone is playing peekaboo, the Indian bank issued a surprise rate cut, the Russians are in shambles and now Swiss -- the Swiss, of all people! -- have broken ranks.

Swiss banks had been considered a safe haven for European capital that feared a blow-up of the euro. To keep too many people from moving money there, the Swiss set a ceiling for the exchange rate between their franc and the euro. That protected Swiss industries, but required a massive amount of purchases of financial assets to keep it going.

The Swiss finally decided last week that it could not go on with that plan forever, so they launched this blitzkrieg. It's easy to guess that they did this in anticipation that the ECB would launch quantitative easing later this month, but it almost doesn't matter. Fearing a currency war, they launched their monetary missiles first.

The central bankers may have thought that they could do this without making waves, but frankly these are mostly academics and do not always understand the real world. Hundreds of billions of francs of bets were on that depended on a mostly flat Swiss franc, and anyone who was short the currency was blown up on Thusday.

These kinds of currency blow-ups happen about once a decade, and have many wide-ranging effects as currency dealers, brokers, hedge funds and others suffer gigantic losses that will never be recovered. This in turn leads to lower confidence and lower risk taking.

Don't forget too that lots of Eastern European consumer and commercial loans are pegged to the Swiss franc, as we learned in the 2008 credit crisis, and those all became instantly harder to pay back. Hope you don't have a mortgage in Poland or Romania.

Going forward, the analysts at Bespoke Investment Group said it seems likely that the SNB won't entirely abandon its management of the currency. Rather than pegging to the euro alone it might adopt a wider basket of currencies as a reference.

I contacted our old friend Satyajit Das in Australia for his take. He was traveling somewhere without phone access but did send me a Citi report that had some useful insights. The Citi analyst asked rhetorically, "Is the strategy to drop peg forever or get the market short and restore peg?" The answer was: "This is a tricky question. There were a lot of lazy EUR/CHF longs and it was difficult to put on short EUR/CHF positions through options, so there was little likelihood that investors were positioned for this. The SNB may want to create a two-way market by raising the possibility that a peg would be restored. Unless they outright say 'never, never' which would mean 'probably not immediately' they may want that kind of speculation to be in place, and leave open the possibility of acting."

In other words, be prepared for the Swiss to potentially backpedal on the policy, which would itself again erode confidence. What a mess.

The dust has not yet settled from the shocking SNB decision to release the 120 floor on EURCHF. Something I had considered possible, but unlikely. 

In rare move for a developed country Swiss Franc appreciated 15%-20% (depending on when you choose to look at the screen) against most currencies.

Now what? Let's forget about money we made a lost or in today's commotion. What is the BIG CURRENCY TRADE for the next few years?

USDJPY  (short Yen) 2010-2014 was the most profitable trade in my career. But it feels mostly done, the way I was thinking about it at conception. Now a new wave of traders who believe in a massively stronger dollar needs pick up the baton.

Short EUR has been another great trade for me. But where it stands today at 1.16, it is long way down from 1.40.

Is Swiss the new BIG SHORT?

I know little of Swiss politics, but clearly no one thinks that such drastic currency appreciation will be good for Swiss markets. But does it in itself mean that the currency has to correct?

I believe it does, but I don't know when and how.

In 2010 when USDJPY was in the low 80's, I had concluded that the levels were unsustainable. I hadn't known what the mechanism of Yen depreciation would be. But I initiated the trade, believing that the economic forces would sort the market out. I could not have foreseen the dramatic political shift of 2012 and the Abenomics.

However, what I need to remind aspiring Swiss bears - it took two year of waiting and 5-6% of downside pain for the USDJPY trade to play out.

Are you ready for the pain and for the waiting?

As many people are pointing out, QE is not as easy implement in Switzerland as it was in Japan. There is not enough sovereign debt to buy. And as the world is becoming more dicey the flows into CHF might increase.

So how will the Franc be able to depreciate? 

I don't know how, but I believe it will. My inclination is to think that eventually they will find a way to print their own currency and weaken it. And maybe they will even overshoot.

Just don't ask me about the time horizon and the downside.

i am initiating long USDCHF (short Swiss), but I am doing it with considerable caution and preparedness for pain.