Central Bank Hoedown, Part II

A 45 minute span around the European lunchtime sees the announcement of policy rates in the UK and Euroland, with the ECB press conference a further 45 minutes later. The broad expectation is for no change from the BOE and a further 25 from the ECB , and Macro Man finds it difficult to argue with that.

The real interest will come in the ECB press conference, where the market will wait with bated breath to hear if Trichet declares and end to the tightening cycle, or at the very least suggests that rates are no longer accommodative. While there is certainly a chance of the latter, Macro Man sees virtually zero chance of the former.

Yet in looking at the strip, the market is pricing in little more than a 50% chance of a further tightening beyond today’s. Some of this may be a reflection that European policy rates are swiftly approaching neutrality, and some of it reflecting the rally at the short end of most curves during the spate of US economic weakness over the past month. Either way, Macro Man reckons that the chance of another ECB rate hike beyond today is a heck of a lot closer to 100% than it is to 50%.

This spells opportunity. Macro Man therefore sells 1000 ERU7 contracts at 95.955. There is a useful risk level at 96.05 which can serve as soft mental stop level. An obvious hedge would be to sell EUR/USD, but Macro Man is nervous of doing so into tomorrow’s payroll data and the concomitant gap risk.

Elsewhere, Macro Man was amused to see the release of Iceland’s Q4 current account data, which revealed a deficit amounting to 31% of GDP (annualized.) For 2006 as a whole, the deficit was something like 27.5% of GDP. Of course, the day after the data was released, EUR/ISK went down. If there is one oversubscribed carry trade that is worth worrying about, it’s this one. Unless, of course, you ask Moody’s, who in their wisdom have decided that the major Icelandic banks now merit a Aaa rating. Right......




Finally, Macro Man was amused by the explanatory pass-the-parcel conducted by the panoply of sell side brokers this morning. On inquiring why USD/JPY had rallied so sharply from its 115.55 overnight lows, he was told that it was because of the sharp Nikkei rally. Fair enough. On inquiring further as to the source of the Nikkei rally, Macro Man was informed that it was because USD/JPY had gone up. Gee, thanks. Of course, these are the same guys that always claim that their clients are ‘doing OK’, regardless of market condition. This begs the question of who are the poor brokers that are stuck covering the funds comprising the HFR Macro Hedge Fund Index? Poor buggers...