Monday, June 11, 2007

Descending the Matterhorn

Well, well, well. Say what you like about this market, but at least it appears to be getting more interesting. Apparently Macro Man wasn’t the only one asking “what the %^&?” about the stunning rally in the New Zealand dollar on Friday evening, as the RBNZ intervened in the currency market, selling kiwi, for the first time in history this morning. Bonds, meanwhile, are now moving as much in a day as they used to in a month. And the US economy, virtually pronounced dead a few short weeks ago, is now expected to grow more than 4% in the current quarter by a few Wall Street economists.

All of this perhaps could (and definitely should) be a recipe for higher volatility. The situation in New Zealand is particularly interesting, as the Matterhorn chart pattern of the past couple of days is certainly suggestive of a blow off top. While it’s easy dismiss the potential impact of the RBNZ, who reportedly sold only a few hundred kiwi, Macro Man is wary that it is always easier to weaken your currency than to strengthen it. He also recalls an episode a year and a half ago when Messrs. Bollard and Cullen visited Japan to warn Japanese investors off of buying more NZD uridashi bonds. Over the next five months, NZD/JPY fell from 87 to 68.
The Malaysian ringgit is another interesting development. Long a darling of macro, currency, and bond funds, the MYR delivered stellar returns for most of this year. There was nothing not to like: a huge current account surplus, not-terribly-onerous funding costs, and a central bank that publicly favoured domestic currency strength. The last few days, however, have delivered a swift kick to the posterior of MYR longs, erasing all of the carry-adjusted gains since February. If a no-brainer like the MYR can cause pain, what might that say about the risks embedded in less attractive propositions?

The environment certainly looks ripe for a rise in volatility. While equity and bond implieds have risen sharply over the past few sessions, the movement in currency vol has been much more modest. Given the intervention from the RBNZ (might other noted whingers the SNB perform a similar action this week?), long currency vol looks like a good bet. If so, then Macro Man’s EUR/USD powerball tickets should continue to perform nicely.

Elsewhere, international trade data are providing conflicting signals. The US April deficit was substantially lower than expected at $58.5 billion, though with real export growth beginning to stall. If domestic demand is beginning to improve, then perhaps Brad Setser’s concerns over the likelihood of a re-widening current account deficit will be justified. China, meanwhile, posted a $22.5 billion surplus for May, the fourth-highest ever. USD/CNY, meanwhile, is up half a percent from last week’s lows. No reason to be anything but mercantilist with the SED over and done with....


Anonymous said...

any thoughts on what is driving the MYR's fall? note that while bank negara malaysia publicly embraced a somewhat stronger currency, it also intervened rather massively in q1 (and seemingly even more massively in may).


Anonymous said...

previous anonymous post = bsetser

Macro Man said...

I think it has been positioning that has been both very large and very complacent. It's been such an "obvious" trade, and a trade that has made good money over the past few months, that people have been thrilled to add on any pullback. Until this one.

My observation is that liquidity has deteriorated very markedly, and that while some folks have headed for the exits, a lot haven't because the cost of exiting appears prohibitive. It's quite remarkable that USD/MYR has retraced almost as much as USD/BRL from the lows.

I am not sure what all of this means, other than perhaps that chances of a good old fashioned EM bloodbath would appear to be a bit higher than at any point since the last one. That having been said, things are still relatively orderly, but I for one am trying to position somewhat defensively in the real job.