Wednesday, January 31, 2007

It was a simple misunderstanding

Currency markets were rocked when Hammerin' Hank Paulson hit the tape 5 minutes before the month-end fixing. The headline read


That was all the headline-chasing FX market needed, and USD/JPY cratered as a result, no doubt making an unhappy end of month for many punters.

However, the substance of his remarks were very different from the initial headline. From the Bloomberg story:

Paulson said he judges that the yen reflects the economic``fundamentals'' of the Japanese economy rather than any sort of``intervention'' by Japanese government officials in thecurrency markets. Japan's authorities have refrained fromselling their currency for almost three years, he noted. ``There has been no intervention in the yen since March of2004,'' he said. ``I don't think there's been verbalintervention for almost a year. I don't like verbal intervention.''

He is talking to of course he is going to say he is watching the yen. However, the substance of his remarks is that he knows why USD/JPY is up here, and he doesn't have a problem with it.

The $/yen sell-off, therefore, represents an opportunity.

Macro man therefore buys $20 million USD/JPY for the beta plus carry trade at 120.89 spot basis, which is 120.43 to the new 1 month forward date, 02 March.

Separately, Macro Man was filled at 6.96 in USD/SEK.

Month-end bullet points

* With eight hours to go, Macro Man's month hangs in the balance. The portfolio has recovered nicely over the past 24 hours, primarily as a result of the New Zealand dollar's ejection from its 747 and subsequent fall to earth. Patience is a virtue, and Macro Man has been rewarded for his.

* Today sees the release of the advance Q4 US GDP figures. Two months ago, both one-trick ponies like Nouriel Roubini and the majority of Wall Street economists were looking for a weak number. While Roubini has been strangely silent on the "impending US recession" recently, the Wall Street crowd has been forced to revise up their forecasts to 3%. The initial number is always a crapshoot, as it depends on forecasts for December trade and inventory figures. Frankly, anything between 2.5% and 3.5% should not be terribly surprising.

* Tonight also sees the FOMC announcement. While Jeffrey 'damn the torpedoes' Lacker is no longer a voter, the statement should be more upbeat than those of November and December, given the sharp improvement in the tone of the data. Yesterday's consumer confidence figures point to a solid payroll report.

* Bonds remain perched on a knife-edge, and Macro Man has a long delta via his short Bund straddle position. On breaks of key levels, Macro Man will have to hedge and get back into the short bond trade. He will therefore sell 100 TYH7 at 105-28 and 100 RXH7 at 104.55.

* The FX carry trade is looking wobbly on the G10 side, but emerging markets are strangely well-bid. A pause before the storm, perhaps? Macro Man will look to trim the short EUR/TRY at 1.8350 spot basis. By the same token, he will leave a stop entry at 0.6920 to sell 20 million USD and buy NZD as part of the beta plus carry portfolio. He also leaves a bid at 6.96 to buy 20 million USD and sell SEK.

* The 110 shares of GG in the P/L represent a dividend re-investment.

*In the 'if value is so important, why do you lot buy so many euros?' department: a key Chinese policymaker said today that Chinese equities are overvalued!

Tuesday, January 30, 2007

That didn't work....

Well, Macro Man tried to be cute and sold his AUD against HUF. Cue predictable straight-line sell-off in HUF. 258 is a key level which has broken this morning. Although it has pulled back to retest the level, Macro Man suspects that it is onwards and upwards for the pair. He therefore buys 12 million EUR/HUF , value 2 Feb, at 257.75.

Monday, January 29, 2007

Home stretch

The first month of the year is entering the home stretch, but thus far today most of the stetching has been performed by those engaged in a yawn. It's been a quiet start to the week to say the least, with the "highlights" dominated by poor Japanese retail sales (though that data is flawed) and a strong retail survey in the UK.

Although equities have done OK in Asia and Europe, EM remains on the back foot. Happily, the carry currencies in the G10 have as well, with sterling in particular putting in a poor show.

This week may prove to be absolutely critical for the US, as Q4 GDP, consumer confidence, the FOMC decision, ISM, and payrolls are all released this week. Macro Man has a sneaky suspicion that bonds will be at either 5% or 4.70% when it's all said and done.

He is tempted to go long the inflation breakeven by buying TIPS and selling nominal bonds....more thought is required, but the deluge of information should provide sufficient volatility to be able to leg the breakeven at a reasonable level.

For now though, let's see how the stock market holds up, as it holds the key to risky asset performance in the near term.

Friday, January 26, 2007

Conversations with myself

Ok, wiseguy. Thought you were a genius, didn't you? Got a little smug when the P/L zoomed higher with the stock market. Thought you had the carry trade played perfectly. You even thought Merv the Swerve had bailed you out in short sterling. But you took the biscuit when you showed me a chart of vol at all time lows.

Well, the joke's on you, bozo. You've gone from a tasty positive back down to negative on the month. When you were counting your winnings from the long SPY, didn't you notice that the 'breakout' was accompanied be negative divergence? Dont you know that that is normally a big red warning sign?

Easy, tiger. The long SPY is a beta position- it stays there until and unless stocks get expensive relative to bonds. And I keep it that way so I don't have to worry about daily swings and moaning from the likes of you. Where you might be able to criticize me is on the Goldcorp. I said I was gonna take some off at 28, then got greedy and left the offer at 28.25. For the potential benefit of an extra $25k, I ran the risk of not getting filled at all- which is what happened. The high was 28.16. Mea culpa.

In any event, I remain underinvested in the beta plus portfolio. I only have 1/3 of the FX carry trades on and 2/3 of the equity position. So really, I am only carrying 1/2 of my alloted beta risk.

And I'm doing that precisely because I am concerned. I am not short bonds, but man, that price action is awful. More worrying is the recent uptick in inflation breakevens. I think that yesteday's equity and EM weakness was a direct result of the breakout in the breakevens. As you know, breakevens give us a pretty good read on volatility- and it is pointing higher.

The daily swings in P/L suggest that we've got plenty of risk on at the moment. Bonds are at a pretty critical level here and seem to be pausing for thought. The central bank bid seems to have vanished just as the street was starting to lean on it, so we've had a nasty squeeze. Meanwhile, the US economy continues to tick along nicely- new home sales were the highest since April! Curiously, the very piece of data that should have sent bonds over the edge have met with, surprisingly enough, a small rally. Could it be that bonds are already catching a safe haven bid, which could in itself be sufficient to right the leaky risky-asset ship?

We need more data. Let's stay pat, leave exisiting orders (reflecting decisions taken during the cold light of day) in place, and see how this stuff closes out the week.

OK, that sounds like a plan.

Thursday, January 25, 2007

Gold, baby!

Macro Man will sell out half his Goldcorp at $28.25. 7.5% in a week is too good to pass up.

Carry Collapse?

Macro Man would like to issue a hearty congratulations to the administrators of the British rail system. Confronted with an historic blizzard, and battling snowdrifts as high as an eighth of an inch thick, the rail system managed to get Macro Man to work today with only one cancelled train. Well done. Your nation thanks you.

On a somewhat less sarcastic note, the FX carry trade is coming under more pressure overnight and this morning. Hawkish comments from, well, a known BOJ hawk prompted a further bout of yen buying overnight. The WEF at Davos has provided a soapbox for all manner of talking heads, and the wittiness of the repartee has been breathtaking:

Japanese Fin Min Omi: The yen should reflect fundamentals!

Ex Vice Fin Min Kuroda: Yen weakness from carry has gone too far! It could correct itself in -wait for it- just TWO YEARS! (Macro Man is quaking in his boots at the prospect)

Current Vice Fin Min Watanabe: Yen isn't a major issue at next month's G7!

'Unnamed G7 source': Everyone but the Japanese wants to talk about the yen, but they are going to pretend not to hear us!

And of course:

PBOC: We need to diversify!

While Macro Man has benefited by delaying implementation of the full carry portfolio, he does not expect a fill scale crisis without confirmation from other markets. Volatility in not only currencies (CVIX) but also equities (VIX) and fixed income (MOVE) is at historic lows. Vol will need to pick up if the carry trade is to collapse.

Just look at the performance of the kiwi overnight: it's gone ballistic on a hawkish statement from the RBNZ, eroding some of Macro Man's hard earned gains.

All is not lost, however, as the rest of the portfolio has fared quite well. The equity beta and alpha trades have moved the portfolio smartly into profit over the past couple of days. Further upside appears to lurk for Goldcorp: the overlay chart with gold suggests a move up to $30!

Macro Man will probably look to take something off the table at $28. At the same time, he is hoping the range breakout in the SPX can produce another quick perecnt, at which point he will start to consider exit strategies for the long SPH7 position.

Wednesday, January 24, 2007


Aud has broken its key supports and looks set for further weakness. In the Alpha portfolio, Macro Man sells 20 million AUD/HUF at 153.10 (153.47 to 2 Feb.)

Snowed under

The UK has been crippled by a winter blizzard this morning, which dumped an enormous 1/2 inch of snow on the ground, thus crippling the entire transport infrastructure of Southeast England. A blizzard has also hit the UK fixed income market, as the twin impacts of a speech last night from Swervin' Mervyn and today's BOE minutes (revealing a closer-than-expected 5-4 vote to raise rates this month) have propelled short sterling virtually back to Macro Man's entry level.

Random thoughts on a Wednesday:

* Everytime Macro Man's commute is disrupted because of the shocking state of the UK's transport infrastructure, he feels a desire to sell sterling. If he followed through on each of these impulses, he'd probably be short the entirety of the UK broad money supply, doing Andy Krieger one better

* GG had a tremendous day yesterday, playing catch-up with gold to a degree. It is still lagging, though, so Macro Man will try to hold on and see if we can get above $28.

* Cold weather + increased SPR + short market = higher oil. The profit take on the puts was well-timed. Vols remain elevated, however, so buying calls doesn't look terribly attractive at the moment. Re-entering a long OIH is a possibility, but Macro Man wants to see a technical breakout first.

*The FX carry trade has suffered overnight on sterling weakness and the low Aussie CPI, which sent the AUD spiralling lower. Carry traders suffered what by 2007 standards represents a catastrophic loss, as carry trades suffered for literally a few hours! On a more serious note, the Aussie is reaching some fairly critical levels against a number of currencies, and Macro Man may sell a break in his alpha portfolio.

* The Colts-Bears Super Bowl matchup suggests that the long equity position should do quite well, even if the Bears win the game!

Tuesday, January 23, 2007

Putting paid to the preposterous principle that puny petroleum prices prevent....

...oil producers from ramping the foreign exchange market when the mood fits them. Yes, ladies and gentlemen, this morning featured a good old-fashioned screw job from the Voldemort fan club, Moscow branch.

Today's frenzy of euro buying (conveniently a day after Macro Man's euro calls expire worthless) was kicked off by Russia with love, if widespread market intelligence is to be believed. So much for the notion that lower oil prices would force these guys to the sidelines!

The Basel branch of the Voldemort Fan Club reportedly whacked some of the yen crosses but not, naturally, NZD/JPY or GBP/JPY, two of the most overextended and overvalued currency pairs on the planet. Macro Man is naturally pleased that he chose to implement the only one of the three possible G10 carry basket currency pairs (AUD/CHF, NZD/JPY, and GBP/SEK) to be offside since he pulled the trigger. Ever get the feeling it's gonna be one of those months?

Two equity trades were executed for the portfolio yesterday. The second chunk of the beta plus SPY purchase was filled at 142, while the market proved the Diamonds are not, in fact, forever as the short DIA position was finally closed at 125.

It's probably correct to expect a bit more equity volatility over the next few weeks as earnings reports continue to pile in. Macro Man's impression is that earnings have been decent but not spectacular, and it's probably appropriate that the market takes a breather to shake out the weak hands. Macro Man remains 141 bid for the balance of his SPY position, but will also look to lighten up on his alpha futures position on rallies over the next week or two.

Monday, January 22, 2007

Toe in the water

It is time.

Judgement week for carry has come and gone, the carry trade remains intact, and Macro Man still has nothing on. The RBNZ meets on Thursday, and Macro Man sees little chance that they can do anything but stand pat. Given that there is still roughly a 25% chance of a rate hike price in, that would presumably lead to a sell off in NZD.

However, the reaction of kiwi is in the face of uniformly dovish data last week ( below consensus CPI and retail sales readings) suggests that it is the level, rather than the change, in interest rates that is keeping the NZD afloat. The kiwi might be a flightless bird, but it can still hitch a ride on a 747, which seems to be the case at the moment.

Nevertheless, it seems silly to gamble on the RBNZ. Similarly, Macro Man thinks sterling has been driven higher by a one-off shift out of dollars and into pounds, and he has little appetite to the the last guest at that particular party.

He therefore will dip his toe in the beta plus G10 carry trade by selling $20 million versus the AUD ( 0.7889 to 02 Feb) and buying $20 million versus the CHF (1.2485 to 02 Feb.) AUD/CHF itself is at levels that seem extraordinarily high by the standards of history, but at least there is relatively little event risk on the horizon.

At the same time, it looks like oil is finally bouncing. Macro Man had to scrape his windscreen for the first time all year this morning, so the weather is turning more supportive. Meanwhile, $50 is clearly a key psychological level on crude. Macro Man will therefore book profits on his June 53 puts at 2.75 today, and perhaps look to buy some calls on a dip in crude.

Friday, January 19, 2007

Busy day

Macro man was busy with admin today so hasn't had time to post anything. Not much to say, really, other than than the soft landing theory appears to be getting more traction than a set of snow tires.

To date, this hasn't had much of an impact on equities or commodities, though it has put some pressure on bonds. However, fixed income in the US and Euroland has held critical support levels, so the repricing of monetary policy has yet to have a malign impact. And of course, the carry trade (to which Macro Man remains sadly underexposed) is faring well.

At this point Macro Man remains underexposed to equities and carry; next week he needs to make a choice. Perhaps contemplation over the weekend will make things a bit clearer.

Thursday, January 18, 2007

Ripped-by Britain

Busy day today, so only a brief post this morning. The BOJ has left rates unchanged, and wire reports suggest that the LDP is applying pressure on them to keep rates steady until the second half of the year. Unsurprisingly, carry trades have fared extraordinarily well, and obvious funders like the yen and the Swissie have been shellacked. If CPI is benign, then the last impediment to the carry trade will have passed, and Macro Man may relectantly be dragged into to slapping on the beta exposure.

The P/L has suffered overnight thanks to all things UK. Short sterling has come off sharply the last couple of days as markets focus on hawkish commentary and the slightly better than expected decline in unemployment. Macro Man continues to believe that the BOE is badly misinterpreting the data but concedes that momentum is against him at the moment. The LM7 position is down nearly 500k, and Macro Man is not prepared to add without a significant P/L cushion elsewhere.

Wednesday, January 17, 2007

Rip-off Britain

The good news:

* NZ CPI was a smidge lower than expected overnight, declining 0.2% Q/Q and rising 2.6% y/y. This should keep the RBNZ from tightening next week, and has sent the kiwi dollar lower as a result (though naturally, not as much as Macro Man would like.) The short NZD alpha trade and the decision to delay the FX carry beta trade looks good from this perspective.

* UK wage data was lower than expected, as average earnings in December rose 4.1% y/y (3.7% ex bonuses.) This is well below the 4.5% region that has traditionally troubled the BOE, and the LM7 position has drifted back to the entry level as a result.

The bad news:

*The GG purchases were, shall we say, ill-timed. Although the financial cost has not been terribly onerous so far, Macro Man will have little patience to wear a loss in what is admittedly a speculative punt.

Depending on which newspaper you read, and when you read it, the BOJ is either a dead cert to tighten rates tomorrow or will wait til February. This has caused havoc in the short end of the yen curve, but it is not immediately clear to Macro Man why it need bother the foreign exchange market either way. 3 month yen LIBOR is currently 0.62%, and Macro Man cannot see that changing much no matter what happens tomorrow. He still retains an interest to sell yen on rallies.

After perusing yesterday's UK inflation data, Macro Man was struck by something quite remarkable. According to the ONS, utilities prices rose 15% y/y, which contributed significantly to the undesirable uptick in y/y inflation. Leave aside the issue of whether or not the BOE should be reacting to utilities inflation (because the demand for utilities is price and income inelastic in the short run, higher utility inflation actually represents a negative income shock)...what Macro Man wants to know is: how the %$*) can utility inflation be rising 15% year-on-year?

The bulk of the rise in utility inflation came from natural gas, the RPI price of which rose 40% y/y. Frankly, this beggars belief. Natural gas prices are a resounding 60% lower than they were last year (because of the shape of the nat gas curve, monthly changes are largely irrelevant)....yet for CPI purposes, they are up 40%!

Now, one of two things is happening here. Either the RPI measure is fundamentally flawed (and indeed, it does appear to lag spot prices by about twelve months), or the utility companies have taken up the mantle of ripping off consumers that the grocery stores and car dealers wore in the late 1990's. Given that the major gas companies have announced a price HIKE for next month despite a 60% decline in Feb natural gas since July, one can only conclude that the utility companies are absolutely nailing the UK consumer to the wall.

This should come as no surprise to those of us living in the UK. This is, after all, an island country, well-known for its damp weather, that had above-average rainfall last year, only for the major water companies in the south-east to proclaim a drought. The same water companies, which sustained substantial leakage problems (the real reason for the "drought"), reported profits in the range of £500 million - £1 billion. Rip-off Britain is back, only now you cannot dash to Calais to take advantage of cheap gas and water.

And for this, the BOE feels the need to raise rates. Hmmmm. Needless to say, Macro Man is talking his own book here, but he cannot help but think that the BOE is significantly underestimating the squeeze to UK consumers. After all, a vast majority of the UK does not earn City bonuses, and today's data demonstrates that annual real ex bonus wage growth is now -0.9%. Last week's rate rise will further squeeze homeowners already being stuffed by rip-off utility companies, rip-off petrol stations, rip-off Mayors of London (it now costs £4 to buy a one-way tube ticket- that's almost eight bucks to ride on a smelly, oft-delayed, non-air conditioned subway), and rip-off train companies.

Trading with your heart is generally a lousy way to earn a fortune, but Macro Man feels obliged to make a gesture in defiance of rip-off Britain. His short sterling position isn't sexy enough, he fears. He therefore spends $300k of premium (that's 30 bps of portfolio p/l) on a one year 1.70 one touch in GBP/USD. At a cost of 6% of the payout, he can buy $5 million worth of payout for that premium. It's a futile gesture, in all likelihood, but one that won't cost much.

But if the rip-off Britain/clueless BOE/shameless taxation by Gordon Brown chickens come home to roost? Well, the trade could be a home run, a slam dunk, a penalty shoot-out victory and a "six" all rolled into one.

Tuesday, January 16, 2007


Gold is trying to put in a bottom and Macro Man is long dollars. Meanwhile, his old friend Goldcorp is lagging the COMEX gold future (see below.) Macro Man therefore bid 26.25 for 100,000 GG, and 25.75 for another 100,000. Hpefully the first slug at least will be filled after the opening retail print around 26.40.

Hitting the links

Well, hurdle one of Judgement Week passed without event. UK CPI printed 3.0%, pretty much what Macro Man had assumed was priced into the pound and the strip. Both are little changed on the day, and in the case of LM7, since Macro Man went long. This week has been fairly tedious to date, thanks in sno small part to yesterday's US holiday. Hopefully, today will see at least some fo the beta plus SPY position filled.

This evening sees the release of New Zealand CPI, and Macro Man wants to see a low number. Yesterday's quarterly business confidence survey hit its highest level sicne 2002, which suggests that the stratosphereic level of the NZD is not hitting as hard as Macro Man believed. Although kiwi gains have been relatively muted in the grand scheme of things, tolerance for further losses from here is very limited. EM currencies have taken a step back, on the other hand, so it will be critical to see how equities perform today. The BOJ either will or will not hike rates, depending on which press report you believe. The sooner the BOJ gets their business over and done with, the better.

As Macro Man waits for the release of key data and the re-opening of the stock market, he has surfed the net and come up with a few interesting tidbits:

* Can you guess the five best-selling cars of all time? One in particular was a surprise to Macro Man

* How many of the 10 best-selling books of all time have you read? Macro Man has laid hands on four of them, but read none cover-to-cover

* Kepler's conjecture, which asserts that the most efficient way of stacking spheres is in a pyramid, has been proven with 99% certitude. The proof is 300 pages long.

* The governments of Venezuela, Iran, and Syria are all avowedly anti-American. Curious, then, that the most popular website in each country is American!

Monday, January 15, 2007

Judgement week for carry

This week is shaping us as judgement week for the carry trade. Consider the following events risks, any and all of which could derail the market’s love affair with at least one aspect of the G10 FX carry trade:

* Tuesday sees the release of UK CPI. After last Thursday’s shocking rate hike, the pound has roared as many carry traders have substituted sterling for dollars in their FX carry baskets. However, Macro Man continues to believe that there is a 3% print already in the price for both short sterling and the GBP. Any inflation print on a 2 handle could prompt a nasty unwinding

* Tuesday evening sees the release of New Zealand CPI. The RBNZ has come down on the hawkish side over the past few months, and many in the market expect that trend to continue. This CPI figure will provide a substantial hint as to whether the RBNZ will be as hawkish on January 25 as many seem to expect. Moreover, the bank will be releasing its own estimate of core CPI for the first time, which will provide the market with a sense of underlying inflation pressures. In the past, DR. Bollard, governor of the RBNZ, has alluded to the recovery in housing as a key inflation risk for the country. However, the latest building consents data actually suggests a relapse (see below).

* Thursday sees the BOJ meet, and with it a chance of a rate hike in Japan. Recent press leaks suggest that there is a good chance of a tightening, although the market evidently remains 50/50 on the issue. Although Macro Man continues to believe that moving rates from 0.25% to 0.50% will do little to alter the attractiveness of the yen as a funding currency (three month interbank rates are already 0.60%), he concedes that the market may see otherwise for a short period of time. Thus, a rate hike could prompt a temporary unwinding of yen-funded carry trades.

* Finally, Thursday also sees the release of US CPI. It’s been several months since the market has worried about US inflation, and a sense of complacency appears to have crept in. However, with the tone of the growth data having improved over the last month, a 0.3% monthly reading on the core data could begin to prompt concerns that the Fed may actually (gasp!) have to tighten rates this year. Such an outcome would likely disturb the carry trade quite a bit.

In a sense, Macro Man is hoping for a bit of disruption. Although he is long TRY, the ultimate carry currency, he is short NZD and has yet to implement the beta plus G10 carry basket in the portfolio. So in actuality he feels short of FX carry, which is not a nice feeling when the yield hogs strap on the feed bag.

Similarly, he has yet to implement the US equity component of the beta plus strategy. After a few early year jitters, equities are looking more constructive as early earnings reports have yielded encouraging news. And at the end of the day, 3% real GDP growth (which consensus is swiftly moving towards for the upcoming Q4 release) and relatively low inflation is a great macro environment for equities.

Macro Man will therefore layer orders to go long US equities. He has decided to do so through the SPY, the S&P 500 ETF. This instrument provides intraday liquidity, pays a dividend, and has a lower fee structure than even the Vanguard 500 index. As such, the total returns of the SPY have been even higher than the Vanguard fund. On the occasions in which Macro Man wishes to hedge equity exposure, he will probably do so through futures.

Macro Man will allocate $60 million to the equity beta-plus strategy, 60% of his nominal AUM. Given the stochastic nature of price action and the upcoming data event risks, he will attempt to do so on the cheap, by scaling bids below the market. He therefore leaves the following orders:

* Buy 139,860 SPY at 143
* Buy 140,845 SPY at 142
* Buy 141,844 SPY at 141

At the same time, he bids 125 to close out his short DIA position. He retains the long SPH7 exposure at least until he has purchased the first slug of SPY.

Strap on your crash helmets, ladies and gentlemen: it promises to be an interesting week.

Friday, January 12, 2007


The portfolio was pancaked overnight, but in a good way. Following the recovery in risk assets and the decline in oil (perhaps due to Trichet's lack of "vigilance"?) , the monthly P/L is now flat as the proverbial breakfast food, having been down more than half a percent earlier in the week.

The stop loss in EUR/USD last week proved to be a fortuitous one, as the single currency has really struggled over the past several sessions. More to the point, the portfolio is left long dollar deltas in a rising dollar market- happy days!

Today's retail sales should be little better than a coin flip. For choice, given the evidence he saw over the holidays, Macro Man would take the under on the consensus forecast for monthly rises of 0.7% headline / 0.5% core. However, given the gift card phenomenon, a weak number might get explained away. A strong number, however, would be unambiguously positive (duh!)

In the UK, meanwhile, the strip is busily pricing in more BOE tightening over the course of the year. A day after the surprising rate hike, Macro Man is still wondering "what's the rush?" Market scuttlebutt suggests King and co. have laid eyes on next week's CPI data and didn't like the look of it. Moreover, anecdotal evidence (in the form of announced pay settlements) suggests a modest upward pressure to wages which will only be supported when City bonuses get paid.

Nevertheless, it looks like the market is getting ahead of itself. At the time of writing, the June short sterling contract is priced at 94.19, pricing in 3m LIBOR rates of 5.81. Since BOE independence, the average basis between base rates and 3m LIBOR has been 0.15%. From this, we can conclude that the market is not only pricing in another rate hike by June, but also at least a 50/50 chance of a second one, which would take base rates to their highest level since the spring of 2001.

Yet this comes in the midst of falling energy prices (even if the rip-off merchants who operate UK petrol stations refuse to pass on the last $10 of declines) and significant financial distress amongst certain segments of the population. Perhaps this is why, despite a reasonably firm housing market and solid wage growth, consumer confidence is closer to the lows of the MPC era than the highs.

It might be brave, it might be foolish, but Macro Man wants to take the other side. He therefore buys 2500 LM7 at 94.20. There is every possibility that the trade could lose money over next week's CPI; so be it. However, Macro Man believes that something close to 3% y/y will now be in the price and risks point to a less malignant outcome. Even if he is wrong on CPI and short sterling sells off further, he will be tempted to add to the position, perhaps as a spread against the US. Even when short sterling trends lower, there is usually a corrective rally that retraces much of the losses. Macro Man will be happy to take profits on a move back to 94.35-40.

Thursday, January 11, 2007


So Mr. King and his merry band of ostriches at the Bank of England have decided that the need to put up interest rates was sufficiently strong that they could not in good conscience wait for next month's inflation report. That sterling has rallied sharply (and the strip declined) should come as nor surprise. Slightly more puzzling is that AUD and NZD caught a bid on the back of the sterling rate rise. Evidently, a hike in the UK is more likely to drag money into the carry trade than suck liquidity out of it. Go figure.

Elsewhere, the SNB is clearly getting tired of seeing the CHF as the carry traders' whipping-boy (along with the yen, natch.) Today's strident comments from SNB presient Roth warned of an abrupt strengthening of the Swissie should the carry trade unwind, but obviously that is a conditional probability. The SNB has been moaning since 1.59 with no discernible effect.

Macro Man is getting an itchy trigger finger and wants to buy equities, but he'll give the market another day to prove its mettle.


The whiplash continues.

Just when it all looked like going horribly wrong for just about everything, the benign US trade figure prompted a surge in the dollar, and the subsequent upward revisions to Q4 growth (gee, 3%-ish growth seems awfully high for a recession) helped spur a recovery in stocks and risky EM currencies.

The overnight session has featured a continued rally in high yielding currencies (thanks in part to a strong employment report in Oz) and a concomitant collapse in funders. The yen is particularly interesting in this regard, as so far this year USD/JPY, EUR/JPY, NZD/JPY, etc. have all eclipsed their 2006 highs. For the past twelve months, 120 has been a severe resistance for USD/JPY, and after a significant battle this morning, the level finally went.

What is interesting is that a rising (risk) tide does not appear to lift all boats, as Asian currencies other than the CNY have generally fared poorly overnight. There appeards to be differentiation going on, with high yielders substantially outperforming their low yielding brethren. However, Macro Man wishes to wait a bit before plunging into the beta plus carry trade. If 2007 has taught us anything, it is that we cannot rely on yesterday's "break" to follow through today. This time yesterday, everything looked horrible. Today, everything looks great. The reality? Probably somewhere in the middle.

Wednesday, January 10, 2007

Risky asset conundrum

OK, now it's just getting weird. Consider the following:

* Commodities continued to get smoked
* EM equities are getting killed
* Governments in Thailand and Venezuela seem intent on screwing foreigners. Yesterday's announcments in those countries sent their respective stock markets crashing, Venny's by an eye-watering 18.7% (see below.)
* EM currencies remain under very significant pressure (Macro Man's EUR/TRY trade has gone from tidy profit to breakeven since yesterday afternoon)


* Developed market equities are holding in (indeed, the Nasdaq is actually up on the year)
* The G10 carry trade remains alive and well (NZD/JPY is up a percent this week)

So why the lack of contagion? And which set of assets is "right"?

The obvious answer to the first question is that there are two different sets of investors trading this stuff; equity/specialist managers for the stuff going down, and macro+yield hogs for the G10 carry trade. Yet this explanation rings hollow. Cross asset correlation has risen strongly over the past few years, an it frankly seems unusual that it would break down just because the calendar has changed to 2007.

As for which market is "right"....well, correctness is ultimately in the eye of the beholder (of your P/L.) But for choice, Macro Man remains of the view that the soft landing scenario remains the appropriate one, and that risky assets should ultimately fare pretty well in 2007. As such, he suspects that the current weakness in EM currencies and stocks will ultimately provide an attractive buying opportunity. By the same token, Macro Man hopes that G10 stocks and carry come under pressure over the next week or two so he can establish longs at attractive levels. Later today, Macro Man will publish a short note on his G10 carry beta plus research....

Today sees the release of US trade data for November, with the forecast forecasting a deterioration back to $60 billion. This comes despite the continued decline in energy prices during the month, as well as below trend domestic demand. Macro Man will take the "under" in the office pool.

On a related note, Macro Man has to smile every time he hears about the inexorable deterioration in US trade and the decline and fall of US manufacturing and exports. The front page of the Times of London today features features a rather large photo of a US export that won't be available in the UK for nearly a year....

Tuesday, January 09, 2007

Carry Me Home

Macro Man has finally found the time to write up the results of his research into the FX carry component of the “beta plus” research program. Of all the macro strategies available, FX carry is among the most attractive to include in a portfolio as a source of “alpha.” Transaction costs are negligible and the long term return to risk profile is remarkably attractive. Indeed, since 1988, a simple G10 carry basket has delivered a return to risk ratio of nearly 0.9. Small wonder, then, that it is such a popular strategy.

The construction of the basic G10 basket could not be simpler. You start with the universe of the G10 currencies: USD, JPY, EUR, GBP, CHF, SEK, NOK, CAD, AUD, and NZD. Pick the three currencies with the highest yield: those are the ones you will be long. Pick the three currencies with the lowest yield: those are your funding currencies. Hold the basket until a currency falls out of either the carry or the funding baskets, then substitute the relevant replacement. It literally couldn’t be easier....and the returns, as demonstrated below, have truly been impressive.

So what’s the problem? Well, Macro Man is a touch concerned that the basic G10 carry trade has gone a bit tabloid. The FT carried a story yesterday on a BGI automated FX fund that replicates the FX carry trade, and Deutsche Bank has already listed an ETF designed to capture the FX carry trade. It’s not exactly the economist crowing over dollar weakness, but it’s not far off, either. These sorts of products are going to introduce a new entrant into the FX carry arena. Without wishing to be rude, the products will likely cater to “dumb” money, and could potentially increase the volatility of what had heretofore been an attractive strategy. The mixed returns of the carry trade in 2006 also suggest that the na├»ve carry strategy could be headed for a period of underperformance, as was observed in the early 1990’s.

So how can we improve the performance of the simple passive carry strategy? An obvious source of improvement is to use some sort of ‘risk appetite’ filter. The theory is that these filters can identify periods in which investors are likely to unwind risky positions, in which case the model can either exit or reverse the carry trade. When the indicators move back into risk-seeking territory, the carry trade is then re-established. A number of banks calculate their own version of these indices, including JP Morgan, Credit Suisse, Deutsche Bank, Morgan Stanley, and UBS.

The chart below illustrates the return of both the naked and filtered (using one of the banks’ risk indices) FX carry strategy combined with the SPX “beta plus” value filter. It also illustrates the returns of the SPX from a buy and hold perspective, as well as the Tremont Global Macro Hedge Fund return index. The returns of each of these are scaled to a 10 % risk level.

As you can see, just two elements of a “beta plus” benchmark deliver superior returns to the Tremont Global Macro Index over the last twelve years! A couple of caveats are obviously warranted. The Tremont Index is net of fees, whereas the beta plus strategy is not. The Tremont index is actual returns, whereas the beta plus index is backtested. Moreover, the history of ‘risk appetite’ indices suggests that something not captured in the index has an impact on prices more often than one would like. So to a degree, there is an element of data mining in the beta plus returns.

Nevertheless, to come even close to the after fees returns of global macro managers using a simple two factor model that does not include fixed income, non-US equities, emerging markets, commodities, or vol-selling strategies is impressive. Macro Man plans to run with the beta-plus portfolio as a foundation on top of which to overlay alpha-generating trades. As ever, timing is of the essence, and Macro Man is not yet convinced that risky assets are out of the water. Although Macro Man does not believe that next week’s BOJ meeting should matter, he concedes that there may be market participants who think it does. As such, carry strategies could easily see some volatility until the BOJ meeting (and its putative rate hike) are safely under the bridge. Macro Man will therefore wait (as indeed he has been all year) for a correction rather than buying thins like NZD/USD or AUD/JPY at nosebleed levels. Stay tuned...


Well that didn't last long. The oil position, like its Amontillado-loving namesake, has met a grisly end. COH7 was stopped at 54.90. Ouch.


Macro Man feels like a character in an Edgar Allan Poe story this morning, the exquisitely named Fortunato in The Cask of Amontillado. 1.2972 was the low of the day yesterday in EUR/USD, missing the stop loss level by 2 pips. For once, Voldemort and his cronies appear to have done Macro Man a favour. The stop remains at 1.2970, along with the take profit at 1.3190, though Macro Man reserves the right to lower the latter in the event of a further tepid rally in the euro.

Also meriting the Fortunato sobriquet was the timely sale of EUR/TRY, which is nearly a percent onside already. And of course, the equity bounce has been beneficial to the long SPX futures position.

Less fortunate of, course, is the foray into long oil, which is 60% of the way to its stop loss level already. The trading gods are no doubt enjoying Macro Man’s punishment for violating one of the fundamental axioms of trading, which is to trade what you know and know what you trade. The speculative foray into energy on the basis of the experts’ opinions has thus far been a mistake. Then again, perhaps it is this position that most resembles the Fortunato character in the Poe story. After all, Fortunato ends up being trapped behind a brick wall in Montresor’s cellar, an end almost as grisly as a $2.50 loss in oil in a matter of hours....

Monday, January 08, 2007


The EUR/TRY forward outright is actually 1.9025, but the short straddle premium is actually 0.66, not 0.76. Clearly time to hgave another coffee...

Monday, Monday

Markets have opened slowly today as traders digest the strong payroll numbers from Friday. To say that market reaction on the day was curious would be an understatement. The dollar rallied, which was as it should have been. That equities sold off a smidge was also not altogether unexpected, given the level of angst that had accompanied flat performance over the year’s first two sessions. However, the extent of the fixed income sell-off ultimately proved to be disappointing, and the collapse of emerging market assets/currencies was also peculiar. Surely evidence that a hard landing is not in the offing should be positive for EM! For the time being, however, emerging markets appear to be keying off of equities. And in the grand scheme of things, USD/BRL rallying 0.5% with the Bovespa down 4% is actually a pretty good show for the real.

Macro Man has a few fish to fry in the portfolio this morning. In no particular order:

*He sells 10 million EUR/TRY @ 1.8850 spot basis, 1.8995 to February 2. This EM sell-off look to be a positioning adjustment, and recent news on the global economy (reasonable growth, lower energy prices) should ultimately prove negative for the euro versus the dollar, but positive for high yielding oil importers like Turkey.

*He ventures a cheeky long in COH7 at 57.50 to the tune of 100 contracts. The stop loss is placed at 55, with an initial target of 60. Too many smart people who know about energy are calling for this for Macro Man not to have a flutter. Last week’s sell-off surely looked climactic, and with index rebalancing this week likely to be a source of energy demand, it’s worth playing. Macro Man buys Brent rather than WTI simply because he didn’t see any newswire photos of Danes stripped to the waist and sunbathing over the weekend, whereas he did see such photos of New Yorkers.

*He sells 500 RXH7 115.50 – 117 strangles @ 0.75. All the “good” news is in the European yield curve, and Macro Man thinks Bunds will be sticky at 4%. By the same token, the news in the US is probably too good to countenance a rally of more than a point or so over the next six weeks. Therefore, collecting some decay in a boring market has some attraction to it.

Friday, January 05, 2007


...and/or his cronies are apparently the only thing standing between Macro Man and his euro stop. Stay tuned...

Confusion de confusiones

Confused yet? Join the club. Risky assets are struggling to decide whether they want to sell off or stabilize, other than commodities, which just look horrible.

Following Wednesday's price action, it looked for all the world like stocks, EM, and high yielding currencies would all get whacked. While the latter two have suffered corrections, US and European equities have put in quite a decent show.

S&P futures, which have a 100% record of getting the market wrong this week (pre-open trading versus the eventual close), are currently lower, perhaps suggesting a surprising rally in stocks is in the offing?

Macro Man must admit to having a relatively low degree of confidence at the moment. The yen is finally correcting, though at this point it is unclear whether this is yet another temporary dip in JPY crosses or something more meaningful.

Certainly the price action in commodities is disturbing- oil just looks horrible. The decision to jettison the OIH position was the correct one and has left the portfolio with a (small) negative oil beta via the June Brent puts. Another couple of bucks lower in crude, and those may start to get interesting.

To top it all off, today sees the release of nonfarm payrolls in the US. The ADP figure suggests that a weak number is in the offing. Ancillary indicators (consumer confidence, ISM, etc.), on the other hand, predict a solid figure. Frankly, Macro Man has no strong feel for today's data. Moreover, he is having difficulty deciding what the market reaction would be.

Bonds traded horribly on Tuesday and Wednesday but than put in an extremely strong rally yesterday- the signals there are just too inconsistent to believe. Macro Man has a sneaky suspicion that the market is hoping for a weak number, which is troubling given that the currency positions need one, too. 2007 has started inauspiciously in macro-land, as December's darlings have turned in January's ugly stepsisters. Many funds are already starting at pretty nasty month-to-date p/l's given the moves in EM, commodities, and FX carry.

Confidence in the short dollar trade is waning rapidly, and Macro Man prefers to lighten up exposure on dollar weakness. He therefore will sell out his long euro cash position at 1.3190, which we could just about get to in the event of a weak NFP. He retains the downside stop at 1.2970 as well.

Good luck!

Thursday, January 04, 2007

What a difference a day makes

Wow. This time yesterday, equities were bid only, carry was on fire, and you were lucky to find an offer in EM. Thanks to yesterday's midday selloff in US equities, carry has been caned, commodities are collapsing, and EM is offered only.

What gives?

Perhaps there was an element of complacency in assuming that December would follow on smoothly into January, and that risky assets would continue to perform. When they didn't, and nascent YTD P/L's turned negative, a selloff ensued.

Regardless, there has already been a fair amount of rumour and innuendo today.

Macro Man has heard stories that:

*There's been another coup in Thailand
*The SNB will announce that it's unhappy with CHF weakness
*Korea will impose Thai-style controls on foreign portfolio flows

All a bunch of rubbish, naturally, but nevertheless a useful insight into how (surprisingly) fragile the market's psyche is. It is too early to conclusively state that the worm has turned and that risk aversion will descend upon us; however, another down day for the US stock market could well trigger such an outcome. Stay tuned.

Wednesday, January 03, 2007

OIH Vey!

The oil servies complex is getting smoked, breaking key support. With exceptionally mile weather in the NE of the US, crude looks vulnerable as well. Macro Man therefore will eat his losses and sell his OIH position at 135.50.


Well, that was a serendipitous fill in cable, as it's gotten whacked by model selling (and buying of EUR/GBP) thereafter.

However, the ADP report registered a negative (-40) for the first time since 2003, raising the spectre of a weak payroll report. Indeed, at least two investment banks (Goldman and Morgan Stanley) slashed their payroll forecasts five minutes after the ADP release. At this juncture, however, it is probably too early to say that the recent skein of solid US data has come to an end.

The ADP has, after all, overestimated payrolls the last couple of months. Could this be payback? Moreover, December is especially tricky for seasonal adjustments.

It wouldn't take much more than an ISM of 53 to wipe away any pesseimism resulting from the ADP, and the Chicago number last month certainly raises the risk of such an outcome.

Indeed, bonds and the dollar have already retraced some of the ADP-related selloff.

Overall, it has been a solid start to the month/year, and it is nice to already have booked some profit, particularly at such a tasty level. Macro Man is still waiting for a good entry point for a beta-plus strategy, which will be revealed in the days to come. Stay tuned...

Profits taken on GBP/USD

Macro Man sold £10 million @ 1.9750 spot basis, which equates to 1.97535 to February 2.

Tuesday, January 02, 2007

Coal in the stocking

Macro Man got coal in his stocking this Christmas, as the portfolio got smoked in the second half of the month. Let's assess the damage:

* Equities topped out mid-month and drfited sideways to lower for the balance of December
* Oil nudged lower and the OIH had a catastrophic reversal of fortunes
* The dollar mounted a recovery against the EUR and GBP on the back of a much improved tone to the data
* The dollar suffered against the kiwi, however, as the flightless bird hitched a ride on a rocket known as 'FX carry.'

Macro Man plans to put on a 'beta plus' strategy in equities and FX carry, but fears he may already have missed the boat, as both carry currencies and S&P futures have gone doo-lolly already. Fortunately, the dollar has come off against EUR and GBP as well, so January is off to a good start.

Macro Man is still catching up with his day job, but will post the results of his carry study and the initiation of the beta plus portfolio later on this week.

Happy New Year!

Back in the saddle

Macro Man is back in the saddle this morning and getting caught up with a week's worth of emails. Looks like trade of the week out of the gates is to whack the dollar, which suits (kiwi excepted, of course.)

Macro Man will hopefully be able to post in more detail (with a final, gory, Dec p/l) later today once he clears his desk at his day job.

Monday, January 01, 2007


In real life, Macro Man is a portfolio manager at a London-based global macro hedge fund, where he trades global currencies, equities, fixed income, and commodities. In his career he has also been a "real money" portfolio manager, an international economist, a sell-side currency strategist, and a currency options market-maker.

This blog is a repository of his views, concerns, rants, and, on occasion, poetic stylings. Macro Man endeavours to take a scientific approach to his investment decisions, and so writes (usually every day) to articulate his views and reassess them in the light of incoming data. The public scrutiny that comes from posting in this space is a valuable ancillary benefit. Occasionally, he subjects readers to his sense of humour and other efforts at creativity.

The blog is written in the third person as a purely artistic device. Nothing written here should be taken as investment advice.

Macro Man does not do advertisements or endorsements, nor does he do "link exchanges" or anything of that nature.

You can subscribe to receive updates via RSS by clicking on the big orange button in the upper right-hand corner, or via email in the eponymously-labelled box in the lower right-hand corner.


This commentary is written for entertainment purposes only. Nothing you read on this site is advice or an inducement to buy, sell, or hold any real or hypothetical investment, nor should you construe it as such.


Q. Why has Macro Man come back?
A.  See here

Q.  Where did TMM go?
A.  Some to sell-side jobs where their blogging careers were regulated out of existence.  Polemic sailed off into the sunset.   They all still lurk, however...

Q. Why did Macro Man leave in the first place?
 A. This post by Macro Man in the middle of May 2010 was his (original) last and explains things

Q. Who  are/were TMM?
A. We are a few old friends of Macro Man who are trying to maintain his style and insight and though we know it’s never going to be the same, we do our best. We are all working in financial markets however our backgrounds are varied across asset classes, geographies, roles and institutions. Why "Team Macro Man"? Though it sounds like a pub quiz team, any other names we came up with for us as a collective sounded even more like one.

Q. Why do you post anonymously?
A. Anonymity confers a certain degree of protection, insofar as we can say what we want without legal threats appearing on our desks or bricks through our living room windows. But more importantly we do not want our opinions, snipes or general bad taste to be associated with our employers. Of course, anonymity also demands a great deal of responsibility, something that we take very seriously. Everything that we write we believe to be true, and hopefully our tongue-in-cheek humour will be obvious should we be appearing to state otherwise.

Q. Can I advertise on your site?
 A. No. To accept advertising would transform the site into a commercial venture, which would mandate a ramp-up in effort and quality that we are prepared to allocate to it at the moment. Plus, we don't like the way web advertising looks. See, not every financial market guy is motivated purely by money! 

Q. Can I do a link exchange? 
A. No. We understand there is an etiquette there (which we presume revolves around advertising revenue), but we are currently too lazy to make a blogroll or include lots of links for the sake of it. Regular readers can probably pick up the sites that we read from the occasional reference. Rest assured, if we use something from your site we will give due credit. 

Q. Can you write less poetry and nonsense and just concentrate on markets?A. No. Writing the fun stuff keeps us fresh and in some small way satisfies our childhood dreams of being a writers.

Q. Can you write more poetry and stuff and less drivel about markets?

A. No. Poetry is for bank holidays, the odd flash of inspiration, and the occasional reader request. The longer stuff is for when we have a good idea and lots of energy. But markets are both fascinating and pay the bills, so that's what we write about most of the time.

Q. Do you read email sent to the contact address?A. Yes, all of it. We make a good-faith effort to reply to everyone who sends us email.

Q. Why haven't you replied to my email?A. If we are busy, out of contact, or inundated with email, things occasionally fall through the cracks. So rather than feel offended, if you want a reply please send the mail again.

Q. How can I become a macro man/woman?A. This is one of the two most frequently-asked email questions. In our experience, every macro trader takes a different career path, which shapes their methodology and style. Many (but by no means all) have spent some time as a sell side flow trader, while others were analysts before making the jump. Still others have spent their entire careers on the buy side, working their way up from being junior dogsbodies to running significant portfolios.

The most important thing in macro, and indeed any trading discipline, is to know your advantage....which is usually something you accrue earlier in your career. This can be technical knowledge, short-term trading ability, extraordinary risk mangement/emotional discipline, or, if you are fortunate, some happy combination of the three.

Q. OK. Can you recommend some reading to help me on my way?
A. This is the other most frequently-asked question. If you don't have a solid grounding in macroeconomics, buy an economics textbook and read it. We have and it was worth the slog. The Economist is a good weekly read to keep up with ongoing developments if you are not accustomed to doing so, though we tired of its agenda and cancelled subscriptions quite some time ago.

In terms of books, we'd suggest Inside the House of Money (Drobny), Hedgehogging (Biggs), the Market Wizards series (Schwager), and Against the Gods (Bernstein) as good places to start. Readers are more than welcome to submit their own suggestions in the comments section. You should be aware, however, of the curious phenomenon in which many macro traders who author or appear in books tend to suffer a disastrous downturn in investment performance soon thereafter. Heck, even Warren Buffett has succumbed to the inexorable "book effect" recently.