Tuesday, April 03, 2007

Zzzzzzzz

April has started quietly so far, though after the end of February and much of March, that’s not necessarily a bad thing. Is it the approaching Easter holiday that’s depressed volumes? The confluence of baseball’s Opening Day and the NCAA basketball tournament final in the US? It’s hard to know. Yesterday, however, was one of the quietest days of the year so far for Macro Man. Will the same hold true for the rest of the week? It’s hard to say, though the release of nonfarm payrolls on Good Friday, with the consequent illiquid markets, may provide plenty of (unwanted) volatility later on.

Equities have liked April so far, though Macro Man has yet to reap the benefits. The DAX, among other markets, has roared higher this morning, reducing the value of Macro Man’s puts to the quarter of the purchase price. Some remedial action will need to be taken: Macro Man will look to sell S&P calls today, and then lighten up on his put position on equity weakness.

UPDATE: Macro Man sold 200 SPM7 1490 calls at 10. This generates $500k of premium, which will more than compensate for the remaining decay bill on the OTM puts he is long. He will retain the put position until Friday at the earliest, then re-evaluate on the basis of incoming information.

The dollar’s a bit stronger today, with no discernible catalyst. By the same token, recent ranges remain intact, so it’s difficult to get terrible excited. Macro Man is cognizant, however, that last Easter Monday saw a breakout in EUR/USD as central banks pushed it higher in illiquid conditions. Will the same thing happen this year?

Two interesting links on exchange rates:

* Japanese households increased their foreign currency holdings from Y20 trillion to Y40 trillion between September 2003 and December 2006. At least part of that increase represents capital gains; NZD/JPY rose 27.8%, including carry, during that period. Even with the increase, Japanese households retain only 2.5% of their financial assets (and even less of their net worth) in foreign currency. Expect Mrs. Kobayashi and co. to remain a force to be reckoned with in the years to come.

* The US Treasury has written a report on emerging market currency reserves. Macro Man was shocked, SHOCKED to see that they conclude the stock of reserves in each of the seven largest EM holders is bigger than necessary. Somewhat surprisingly, the authors chose to focus on EM countries, leaving Japan unscathed. That is highly suggestive of where the Treasury’s priorities will lie in the forthcoming IMF/WB/G7 meetings in Washington.










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