Unite and take over

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?