Tuesday, March 04, 2008

Which comes first?

What a great time to be a macro trader. At market inflection points, abrupt changes in policy regime, and at relative price extremes, there are is often a rich vein of opportunity that is not available to the long-only or single-product specialist. (The flip side, of course, is that when there is easy money to be made from the long side of equities, no one gives a hoot about macro!)

Certainly each of the above circumstances could held as true today. Equities, or at least US equities, may (and Macro Man still hasn't made his mind up about this one) be transitioning from bull to bear. The Fed has gone from hawkish at the beginning of August to slashing rates like a bunch of machete-wielding whackos. Many commodities are at all-time nominal highs.....and the dollar seems to be very cheap or very expensive against just about every currency under the sun. What's there not to love?

As the euro has ground through 1.50, the yelping from Eurozone politicians has begun to escalate in volume. Ecofin chief Jean-Claude Juncker, the so-called "Mr. Euro" (the world's least potent superhero!) notes his "increasing concern" about the single currency.

Of course, Europe has moaned off and on for four years, since EUR/USD first reached about 1.25. To date, they have done nothing to back up those concerns, unlike 2000-01 when there was sporadic FX intervention to prop up the overly-weak euro when it traded below 0.90. (How long ago that seems!)

Meanwhile, Macro Man's view that politics would hamstring the MOF from intervening in the yen has thus far been borne out, though the real stress test will likely occur below 100. Of course, if a strong currency were really as corrosive as finance officials actually believe, then central banks in both Europe and Japan have the opportunity to trim interest rates, which would both ease monetary conditions and dull the luster of the euro and yen against the dollar.

In the Middle East, a private sector bank in Abu Dhabi noted yesterday that the country is still studying an adjustment of its currency peg. So that issue may not be dead, either.

Here we are, then, with a number of currencies clearly misaligned against the buck, and a growing concern (though not in Australia!) about where it all ends. So who will blink first? Certainly not the Yanks, who have a bubble to re-inflate and an election to conduct. Macro Man isn't sure...so he opens it up to the court of public opinion. Fill in the poll below as to which policy change is enacted first.

Note that Macro Man has lost Bloomberg access this morning, so the P/L cannot be updated.


Anonymous said...

if the fed is flighting a recession and the ecb is fighting inflation can either of them win? what does it look like if both lose? global stagflation and either the dxy at 20 or -3% gdp growth maybe

Throw said...

HFRXM and SPX have never been more uncorrelated as far as I can tell... that was a brilliant observation a while back, by you.

2and20 said...

reading that bloomberg article on australia, i find it amazing they have a current account deficit.

i don't actually know very much about the economic situation there, but for a country that's supposedly full of natural resources to have a c/a deficit in the middle of the biggest commodity bull market in history seems surprising no? what happens when global demand slows and prices fall (as i personally suspect they will)???

Anonymous said...

Australia's current account deficit is the result of a small trade deficit (tho that may be changing; i haven't looked at the data recently) and a large deficit in the income balance from a long history of borrowing from the rest of the world. High AUD int. rates add to the deficit in the income balance.

on the trade side, Australia has had a run up in housing prices that has supported imports, and the strong AUD also increases demand -- offsetting to a degree the improvement in australia's terms of trade.

prophets said...
This comment has been removed by the author.
prophets said...

Japanese Ministers Signal Concern Over Yen's Climb


Anonymous said...

"reading that bloomberg article on australia, i find it amazing they have a current account deficit."

Not a surprise at all to anyone who follows the macro picture. I believe they have a lot of risk longer term (they have a median home price seventy percent HIGHER than the United States along with that massive trade deficit).

If fact, back in December, I saw a list of the seven biggest trade deficits in the world (NOT adjusted for GDP - in other words, ranked by raw value):

1. United States
2. Spain
3. United Kingdom
4. Australia
5. Italy
6. Greece
7. Turkey

An impressive feat for Australia to rank so high on the list with a population of only twenty million people.