Tuesday, July 24, 2007

The sky is gray and white and cloudy,
Sometimes dollar-yen is selling off on me
And the brokers, they start to yell
They think yen strength's really swell
And that shorts are goin' to hell
But here's Mrs. Watanabe, now I'm felling pretty well...

- Simon and Garfunkel, "Cloudy" (alternative universe version)

Ichimoku-mania has continued unabated this morning after USD/JPY broke the key cloud support at 120.68 in Tokyo trading. As forecast yesterday, the sell side brokerage community is all in a stir, and for the first time all summer Macro Man now sees more clouds in his Bloomberg message box than he does in the sky.

What does it mean? Is this the end of yen carry, a development which could kick another leg of support out from under the global risk trade? Probably not. Noted carry currencies such as the AUD and NZD, favourites with Japanese retail, aren't exactly rolling over today. And lest we forget, the last break of the cloud support (highlighted below with the arrow) was a superb buying opportunity for USD/JPY.

Elsewhere, a milestone piece of data was released today, but naturally no one cares. The Eurozone current account for May posted a monthly deficit of €14.6 billion, well wider than the expected deficit of €4.2 billion. This deficit was the widest monthly reading on record. Of course, no one cares, because the US deficit is so much bigger in absolute magnitude and, don'tcha know, the dollar is going down forever. Yet the EMU figure, despite the inherent noisiness of the data, is emblematic of something that Macro Man believes very strongly: that an artificially strong exchange rate (the usual outcome for a reserve currency) will ultimately beget uncomfortably large external deficits. It may be years before such a development comes to pass (outside of France, naturally), but come to pass it will.

One somewhat frightening chart is making the rounds this morning that appears to exemplify the dangers of subprime to even "safe" investments. The chart below shows the price of a Luxembourg-based USD money-market fund that is designed to deliver one month LIBOR plus 0.50% per annum. Now as we all know, you cannot get something for nothing, so one way to pick up that yield premium is to take credit risk. The problem, of course, is if your "AAA rated" security is really a piece of subprime junk wearing Groucho glasses. If the price data furnished by Bloomberg is accurate, it suggests that there must be a few unhappy investors out there whose safe cash-plus fund has turned into a 14% monthly loss.

And if that can happen to a money market fund, one wonders what the portfolios of leveraged credit longs must look like. Macro Man is kicking himself for never putting on the long equity/short credit trade, as neither has seen the correction that he'd been waiting for.

Finally, Macro Man was talking with one of his counterparties this morning, who wondered allowed how deleterious the impact of US ARM resets and generalized housing weakness will be. Macro Man's answer was "not very", as the amount of extra mortgage payments from resets is trivial from a macroeconomic perspective, while household net wealth has remained pretty resilient despite the weakness in housing. Were the equity market to follow the housing market lower in the context of rising unemployment, then Macro Man would feel more comfortable in beginning to contemplate rate cuts and a possible recession. That having been said, it always makes sense to hedge when the market lets you, so Macro Man might slap on another low/zero cost option overlay should equities have another nice day.

Posted by Macro Man at 9:47 AM  


In case you're wondering. Japanese FX margin traders on the TFX lifted their net long positions on the yen crosses (USD, AUD, EUR, GBP) by a cool 30% on Friday/Monday, and overall longs are record (on admittedly young data). Ichimoku be damned.

tmcgee said...
1:24 PM  

Yeah, I saw that. No doubt if Wagner were alive today he'd write on operatic piece called 'Ride of the Watanabes'.

Macro Man said...
1:44 PM  

re: the eurozone -- agree that the strong euro implies a current account deficit. right now that is the only way the world economy can adjust. the weak RMB (and weak yen) imply a rise in Asia's current account surplus that surpasses the fall in the oil exporters current account surplus, which may not fall all that much in any case if oil stays in the 70s ...

I actually have been surprised that the eurozone balance moved from a small deficit (it was tracking -40/50b euros on a rolling 12m basis for a while) into what looked like surplus/ balance. The current deficit is at least partially a product the swing from $50 to $75 a barrel oil. but the strong euro isn't helping. The us bilateral deficit with Europe is falling fast. and China/ Japan are both registering large increases in their bilateral surpluses with europe.

in any case, the US trade deficit cannot get much bigger, so the only real way east asia can sustain its growth strategy is by inducing a bigger european deficit. or put differently, europe can enjoy the fruits of offering a reserve currency to a reserve rich world ...


Anonymous said...
2:24 PM  

sarko aside, why is europe so willing to tolerate this? i mean, judging from the gripes back in 2000 the gentlemen of frankfurt should be slapping themselves on the back for a euro where it is. but i'm still surprised europe hasn't made the yuan as much of an issue as the US has. i guess that may change slowly as the trade-c/a balance does. it does seem like the burden of pressure is more on europe these days than the US.

tmcgee said...
2:33 PM  

There have been a few rumblings from Ecofin, but you probably need to see a meaningful deterioration in Europe's economic prospects and/or external balance before the complaints start in earnest.

As you note, Germany is close dislocating a shoulder in patting itself on the back for the euro's strength, but wait until that strong euro is counter do the monetary policy needs of the region generally and Germany in particular.

Macro Man said...
2:40 PM  

Barry Ritholtz lifted this from you and attributed it to his equally bearish buddy Mike Panznar

Anonymous said...
5:40 PM  

is Barry Ritholtz a stupid nut ? i thought he is a credible fellow

the big mouthed ahole lifted this from here ? too bad

Anonymous said...
6:11 PM I noted in the post, the chart WAS floating around the London market this morning, so it's not like I "found" it by myself as such. And I'm pretty sure that Mr. Panzner visits here occasionally, so it's entirely possible that he saw it and passed it on to Mr. Ritholtz, perhaps even with attribution.

BR is apparently no fan of this space, however, after I denigrated the quality of some posters on his site (some of whom he himself refers to in disparaging terms)and a poster here accused him of biased analysis.

However, life's too short to worry about something like this, particularly when it may have come to Mr. Ritholtz in the manner he suggests.

Macro Man said...
6:33 PM  

MM - I responded to your comment on Avian FX....See here


"Cassandra" said...
9:00 PM  

"The former Ichimoku cloud resistance zone is now below spot and is turningin into support, and there are also several rising trend-line support clusters on the 118 handle."

07/25/07 - from a Swiss bank's sales desk...

Anonymous said...
1:48 PM  

BR's not a fan of yours because you run real money and have a clue ..... he worked for a penny-stock firm for many years before going out on his own .... he mistakes being articulate , which he is , with being smart , which is questionable

Anonymous said...
5:07 PM  

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