Unite and take over

Monday, July 23, 2007

Oh, dipbuyers of the world
Unite and take over
Dipbuyers of the world
The sell-off's over
Sell-off's over
Sell-off's over

- The Smiths (alternative universe version)

Although a few more cracks are appearing in the risky-asset space, the dipbuyers of the world continue to selectively exercise their mojo to keep various risk trades alive. While Friday's price action in equities, credit, and the yen was somewhat gut-wrenching, collateral damage this morning has been relatively minimal. Stock markets in Asia and Europe aren't showing much signs of distress, and risky currencies like the Aussie and Kiwi dollars are making new highs (against the greenback, at least.)

Turkey is more popular today than during Thanksgiving and Christmas combined, judging by early market reactions. The favourable result from the weekend's elections has produced a strong rally in Turkish equities, bonds, and the lira, which has helped assuage any fears of a spillover from Friday's ugliness. Naturally, Macro Man was triggered out of his FX carry basket, which was executed before the DOTW really got stuck in this morning. C'est la vie....

Of course, it's not all sweetness and light. Credit is still looking ropy, with the Euro crossover spread index punching up towards 350 bps this morning. However, the market's attitude towards the impact of credit distress is somewhat curious. Despite the fact that S&P downgraded some European credits on Friday (the alarm must have gone off!) , markets were happy to sell the dollar pretty aggressively.
It seems to Macro Man that selling dollars may work during mini-periods of risk aversion, or when concerns are not too deeply entrenched. If it really hits the fan, however, Macro Man would expect the dollar to rally as USD-funded trades (long €, long EM, etc.) are closed. One exception, of course, could be USD/JPY, where most participants with a position are long. It's amusing that whenever the yen starts to boogie, London brokers begin sending out ichimoku charts to anticipate how Japanese accounts will react.

For those fortunate enough not to be familiar with ichimoku, it is a rather bizarre and convoluted charting technique apparently popular in Japan. Western brokers without the foggiest idea of how the chart is calculated are particularly fond of referring to the significance of the cloud and the potentially catastrophic effects of a downside breach. Now, Macro Man is as fond of technical analysis as the next man, but he prefers to understand what he his looking at- how it's calculated, why it can be expected to work, etc. When brokers send out ichimoku or DeMark charts without the slightest idea of how they are calculated, he can only shake his head and understand why technical analysis enjoys an unsavoury reputation in some circles.
Elsewhere, in honour of the release of the last installment of the Harry Potter series (no plot spoiling please!), Macro Man has finally gotten around to updating his Voldemort and co. FX reserve spreadsheet to include Brazil, making it well and truly a BRICs analysis. While he was aware that Brazil's FX reserves have been growing quite strongly, it was only when he saw the chart that he truly realized the extent of Bacen's accumulation- FX reserves have more than doubled since this time last year.

When he replaced Taiwan with Brazil in his calculation of required euro purchases to maintain benchmark, he got another jolt- the Q2 figure rose by nearly €10 billion. Now, this is an approximation, and Macro Man doesn't have a good grasp of Brazil's portfolio- for all he knows, it could be entirely in $. By the same token, of course, the above does not include any of the Middle Eastern monetary authorities, who are likely accruing reserves and assets even more quickly (in absolute dollar terms) than Brazil, and some of whom clearly keep a relatively low dollar proportion of their assets.
With a tailwind like that, is it any surprise that the risk trade is to buy Europe/USD, even at the current lofty levels?





Posted by Macro Man at 10:02 AM  

23 comments:

Hi MM. Don't know if you've yet had a chance to look at Jen's latest. He provides an interesting analysis of how diversification from real money managers in the US may be playing a role in driving USD weakness. It's an interesting addition to the Voldermort et al story.

Econocator said...
12:30 PM  

That US investors have seen a reduction in home bias isn't exactly new news....it has been evident in the TIC data for a considerable amount of time. And to be sure, it is a partial explanation for dollar weakness.

By the same token, a reduction in home bias is not exactly a uniquely American phenomenon, as the ubiquitous Japanese housewife demonstrates.

Nevertheless, the amounts from the FX reserve managers are so large, unidirectional, omnipresent- and, perhaps most importantly, permanent- that I believe they are far and away the most powerful explanatory variable. Lest we forget, Mr. Jen denied that FX reserve managers were even exerting much of an impact until a couple of years ago.

Macro Man said...
12:59 PM  

MM, good morning (in São Paulo time). Brazil´s reserves are indeed practically 100% invested in US Treasuries, and there isn´t really much talk of diversification yet around here.

avinash goldfish

Anonymous said...
1:03 PM  

I can't figure out why various people/institutions are so enamored with the decoupling thesis of global growth. Nothing is decoupling and the ROW apparently is going to send every piece of savings on earth to the US. What is the longterm thought process? None because governments only care about the status quo.

James said...
1:11 PM  

Thanks Avinash. Given that Russia's are at most 50% $, the portfolio weight assumptions in the calculation are probably rendered more, rather than less, accurate by including Brazil's 100% dollar allocation.

Macro Man said...
1:11 PM  

In fairness, James, the ROTW has been more resilient to subtrend US growth in H1 than many, including myself, expected. If anything, criticisms of de-coupling are probably best addressed to the phenomenon of the rest of the world carrying the US with it via net exports, at least on the basis of this year's data....

Macro Man said...
1:14 PM  

Ah yes, the Ichimouku cloud. One of my favorites even though I'm guilty of the ignorance you mention -- I still have not mastered the intricacies of the signals of intercrossing tenkan, kijun and chikou spans. Luckily, I don't think many Japanese investors have either. One important point is that for all the Ichimoku cloud breaches of the past few years, either daily or weekly, it hasn't arrested the uptrend. I guess with all technical analysis what helps is finding signals that converge. Hence it is helpful to view the bottom of the Ichimoku cloud in USD/JPY near 120.70 in light of the double-bottom at 120.77 in June and the 90-day moving average at 120.70/75. Hence, watch 120.70. But just as the break of the March/July uptrend is by no means threatening the uptrend yet, nor would a breach there. It would just maybe raise a few eyebrows. USD/JPY has a ways to go before it really gets ugly technically (or technically ugly).

tmcgee said...
1:54 PM  

I'm waiting for a convergent signal between the ichimoku cloud, a TD 13 count, a break of a Gann fan support line, and the sunspot indicator to roll over before whacking $/JPY. Seriously though, if the pattern holds, the obvious level at 120.70 +- goes, CTAs get stuck in down to 120.25-50, and then Mrs. Watanabe comes in, says thank you very much, and we go back to 122 by Thursday. I'd be very surprised indeed in my carry basket remains dormant all week...

Macro Man said...
2:00 PM  

Ha, ha -- nice. Well, yeah. I mean the word in Tokyo today was that the FX margin traders were DISAPPOINTED the USD/JPY slide wasn't deeper.

BTW, thanks for the constant Smiths reminders. Somewhere in my travels I lost my Singles album and this is the perfect time to rectify that via iTunes.

tmcgee said...
2:09 PM  

Interesting insight re: Japanese retail. I have to confess, after posting the first Smiths reference, I've had The Best of the Smiths on heavy ipod rotation....

Macro Man said...
2:41 PM  

Bacen's reserves are 85% $ or so -- UBS provided the exact number at the euromoney conference in May, and mostly in Treasuries. Taiwan also seems to have a high dollar share -- its reserves don't move much with moves in the Euro-dollar.

I don't Bacen selling is a big source of euro demand and thus a major contributor of euro strength -- look to the PboC, the Bank of Russia, the Reserve Bank of india, some big sovereign wealth funds and Jen's real money US accounts (apparently real money in europe isn't as fond of the $ right now ). Bacen was tho buying about $10b of US treasuries a month in March and April (but far fewer in May, for unknown reasons).

bsetser

Anonymous said...
4:04 PM  

re:Ichimouku cloud

That's interesting, I've never seen that sort of chart. Along with the candlestick method of charting, The Japanese are really the masters of making intriguing and aesthetic charts. Not sure if they work, but they sure look nice.

jp said...
4:20 PM  

About a month ago, I mentioned going long gold around $650, which I've now exited. The theme trading of long assets, NZD, AUD, CAD, among others as the S&P goes up tick-for-tick, although aggravating & correct, seems to be showing minor cracks which could grow. The USD/JPY ichimoku charts might turn into "ichiwawa" charts if global equities loose their risk preference. I'd look for better long gold opportunities after some aversion sets in.

Corey said...
4:47 PM  

Interesting, Corey....and nice trade. Brad, I suppose that BRL reserve growth could be used as a proxy for that of other, less $-centric CB/MAs. And as I noted above in the comments, that BRIC reserve allocation probably isn;t too far off 70/30 or 65/35 $/non-$. Whaddya think?

Macro Man said...
4:51 PM  

70/30 is probably too high -- russia and india are more like 50/50, and russia at least is adding to its reserves rapidly. 65/35 seems better, even with brazil. China obviously matters more than anyone, and there isn't good current data on the composition of its assets that I know of. 70/30 is consistent with reported Chinese holdings of US assets as of june 06. but who knows, maybe china has changed policy.

Anonymous said...
5:21 PM  

hi, macro
you forgot venus going retrograde this week...

the DeMark 13 when it falls on many things at the same in the past meant something and now has weekly counts on euro, $ index etc... but leaving aside the esoteric many things are converging

did you read Dumas of lombard on the ft.com saturday.. the last chinese data seems just too much, official inflation 4.4% alone means they have to revalue somewhat.. and the japanese election and defeat of Abe... and the 100 mld subprime loss mentioned by BB himself...and the emerging carry trades going parabolic... and the CRB and oil new records

all those things together hint to a reversal

how long has been sinche the carry trade turnerd, the dollaro went up, commodities and indice down ?

I would start with Copper, $/CHF and the indices here and if they start to reverse then NZD and other correlated stuff

gz said...
6:24 PM  

Why do you see the Aussie as a risky currency?

Anonymous said...
2:31 AM  

"My only weakness is a listed crime"....

Too bad that we shall never see Morrissey w/ Johnny Marr again. Supposedly offered a few million $s a few years ago to reunite at Coachella, no dice.

Suppose that isn't much in Cable these days.

Robert said...
3:27 AM  

Anonymous, I characterize AUD as a 'risky currency' because it is a currency that people buy under normal, non-risk averse circumstances to make money.

The USD, on the other hand, is not currently a risky currency because people are shorting it to make money under non risk averse circumstances.

Macro Man said...
5:37 AM  

MM, I've been wondering about your term risk assets too. To work through it... people are buying the AUD under normal, non-risk averse circumstances because rates are high in Australia, thus all one needs to do is borrow in the US and invest in Australia. Easy profits, all things staying the same. Is that right? By that token the NZD is a risk asset, but the yen isn't.

How do you apply your category of risk assets to commodities like gold, oil, and copper?

jp said...
7:00 AM  

do you know any good and simple trading system for retail investor ?

invest tool said...
8:22 AM  

Re: AUD "risky"

That's a very interesting definition. Thanks for that.

Anonymous said...
12:58 PM  

JP, commodities are a bit of a moveable feast, but at the moment I would concur that they are "risky" and could/should be expected to go down in the event of a gut-wrenching risk aversion event. Gold, for instance, is little more than a proxy for the dollar these days, and a poor one at that, given it doesn't pay any interest.

Invest tool, I believe TradeStation is supposed to be quite good, but that is just hearsay- I've never personally used it.

Macro Man said...
1:12 PM  

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