Thursday, September 21, 2006
Talk about an anticlimax. The FOMC statement could be summarized in three sentences:
1) Growth is slowing; we think inflation will too.
2) We might have to hike a bit more; then again, we might not.
3) Jeff Lacker wanted to hike today; the rest of us voted him down.
The outcome is ‘as you were’, the both the Fed and the market waiting to see if housing kills the US consumer. If it does, the bond market is probably cheap at these levels. If it doesn’t, the bond market is pretty expensive. Given that terror, wars, $3 gasoline and a stock market meltdown have yet to kill the consumer this decade, Macro Man is skeptical that housing is the proverbial straw that broke the camel’s back, particularly with the corporate sector in robust health.
However, it will be a while before anyone knows the true outcome. In the meantime, it’s a waiting game. And when markets know they have to wait, they like to get paid. This explains the popularity of the carry trade over the last two weeks, and at this juncture it’s hard to see that affinity not continuing for a while longer. Sure, Brazilian politics are heating up and Hungary is a mess. But hey, Thailand isn’t exactly the Garden of Eden, and the THB has already re-traced virtually all of its coup move. The resilience of antipodean currencies in the face of bad data/weak commodities and the market’s headlong rush into sterling at sky-high levels suggest that carry is alive and well.
Given that Macro Man’s current positions are essentially long volatility, anti carry strategies, it is time to slap on a hedge. Therefore, Macro Man sells $10 million USD/TRY 1 month forward at 1.4920. He sets the initial s/l at 1.50 spot basis.
Macro Man is at an offsite tomorrow and over the weekend- an excellent use of his time. He'll be back, perhaps bloodied but always unbowed, on Monday.