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....