Thursday, September 11, 2008
Another day, another disappointing lack of collapse in European equity markets. While Macro Man is trying not to tick watch and remains firmly committed to the bear trade on a medium term basis, he has to concede that the lack of instant gratification has been frustrating in an environment where mistakes are swiftly punished.
One market where gratification has been instant is New Zealand, where yesterday's surprisingly aggressive 0.50% rate cut has sent NZD/USD 2 cents lower in fairly short order. Not that there hasn't been a sting in the tail; as noted at the end of yesterday's running diary, Bloomberg misreported the move as a 0.25% cut, in line with market expectation. Misreported central bank activities happen with surprising frequency on Bloomberg; Macro Man is coming perilously close to purchasing a tin foil hat with respect to Bloomberg News. In any event, he has been dragged back into the short NZD trade; one of his most profitable analytical frameworks has been to sell those currencies where CBs go for growth, which the RBNZ has.
There are, of course, other markets in free fall. While Macro Man doesn't really trade a number of these, it is still interesting to observe the value destruction that's going on.
Remember when precious metals were the only "real" store of value left? How much retail money poured into metals ETFs? Silver is down 50% (!) from its highs in March. 50%! That's truly impressive.
Oil is now back to last year's closing levels; if it doesn't bounce soon, the base effect on inflation data will lead to a significant reducton in CPI prints globally. To a degree, it's already happening; Chinese CPI is already surprising to the downside. While Macro Man was happy to trade an inflationary theme earlier in the year, it's pretty obviously been the wrong way to look at the world for the last few months. Fortunately, he hasn't thrown much, if any, money down that particular sinkhole, though the bid for US 30's might reflect something of a deflationary trend.
One market where the collateral damage has been significant is Russia, where the equity market is down nearly 45% over the past few months. It just goes to show that if you actively seek to screw over investors and stick up two fingers at the rest of the world, your markets will eventually get punished. This begs the question, of course, of why the SPX isn't 20% lower.
EUR/USD, meanwhile, remains in free fall as well. This has been something of a source on consternation to Macro Man, as he's felt a significant opportunity cost from not really participating. On the other hand, his expectations for the dollar have so far been wrong: it hasn't settled into a range trade like he thought. So from that perspective, not making money in a move that he didn't expect is no reason to beat himself up. Regardless, we are approaching pretty critical levels in the dollar. EUR/USD is now back at the level prevailing when the Fed first cut rates a year ago; the year on year change in the pair looks set to turn negative for the first time in two and a half years.
On a longer term basis, 80 was a critical long-term support for the DXY for 20 years; when it finally broke last autumn, the follow-through was swift and dramatic. The DXY is now retesting the 80 level, which should act as staunch resistance. If the USD is going to fail, it should start very soon. If it keeps going and closes this month above 80, it will be a powerful signal that the seven year dollar bear market is over.
At this point, Macro Man is trying to remain flexible on the dollar while retaining conviction on higher quality trades. Hopefully, this modus operandi will keep the most important number on his screen, the P/L, from free fallin'.