The Drawer

The dust is settling after yesterday's big central bank day with most major market prices left in well-established ranges. Things have the distinct whiff of summer; market liquidity is waning, Wimbledon tennis is on in the background, and the rain clouds are starting to roll in.

Yesterday's ECB tender came in somewhat to the high side of expectations (though well below some of the speculative figures that had been floated) at €442 billion. Cash rates have fallen sharply, and the Sep Euribor contract is now coming close to pricing the 3 month interbank rate below the ECB policy rate.

This, combined with much better than expected durable goods figures, helped prompt equities higher aheaad of yesterday's Fed announcement. (Nothing to see here in new home sales, move along, move along.)

The five year auction was a strong one, with am solid bid to cover, short tail, and solid participation from indirects. This gave US fixed income a bit of a fillip, which somehow morphed into a melt-up in the few minutes before the Fed announcement. The timing of the rally was peculiar, to say the least.

And when the Fed came out and promised to keep rates ultra-low for an "extended" period (which sounds to Macro Man's ear like it is longer than than the 10.5 month "considerable" period of 2003-04), it appeared to validate the rally, in the white eurodollars at least.

Yet the ommission of any reference to the threat o corrosive deflation was taken as a hawkish comment, and bonds and eurodollars swiftly gapped lower. Neither have traded back to their 7.14 pm London levels.

Yet stocks have shrugged off this "hawkishness", when one might reasonably consider that they should be among the most affected by the absence of any further Fed lovin'. Indeed, Spoos are now trading above their pre-Fed levels....not exactly what you'd expect from a "hawkish" statement!

It's safe to say that the drawer labeled "things I understand" is rapidly emptying. Indeed, when Macro Man checked this morning, the sole content of the drawer was a piece of paper bearing the phrase "don't trade EUR/USD".

Indeed, that was the lesson learned from the real central bank fireworks yesterday, courtesy of Macro Man's buddies at the SNB. He somehow missed the appointment of Rip Van Winkle to the SNB board (perhaps it happened in 1988?), but the Swiss roused from their slumber with a vengeance yesterday, hoovering aggressive amounts of USD/CHF. This in turn helped submarine the nascent rally in the euro, sending us careening back to the well-trodden territory of the a 1.39 handle.

One thing that Macro Man pretty clearly doesn't udnerstand is the SNB's decision-making process in determining the timing of their intervention. Perhaps he should shave with Occam's razor; maybe it really was as simple as a defense of 1.50 in EUR/CHF.

That, of course, begs the question of why the SNB chose to intervene primarily in USD/CHF. There is one school of thought that after their prior activities in EUR/CHF, their reserve basket was underweight dollars so they were simply rebalancing their portfolio by increasing the dollar weight. (At last! A CB that isn't trying to kick George Washington while he's down!)

Then again, maybe they wanted to give the ECB as little reason as possible to whinge about their activities. Word on the strasse is that Frankfurt was none too pleased with the SNB's purchases of EUR/CHF in March, which perhaps helps explains the SNB's lengthy slumber.

By intervening primarily in dollars, the SNB is sort of cutting the ECB out of the equation; the Eurozone can hardly moan when the SNB isn't actually trading the euro. And hey, if the market takes EUR/CHF higher as as the SNB buy USD/CHF, the Swiss can say "wasn't me, guv, honest!" to the ECB.

Then again, maybe it isn't a coincidence that the Swiss came out in force ninety minutes after the ECB published the results of their LTRO. After all, the ECB have sort of lost the moral high ground over the Swiss version of QE after conducting a wheelbarrow tender of their own.

All of this is very interesting, of course, but still leaves Macro Man scratching his head. Just call it another entry for the drawer labeled "things I don't understand", one currently located in a very large warehouse in the English countryside.
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29 comments

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June 25, 2009 at 10:00 AM ×

Anyone else get stopped out this week? This sucks. Asia is getting more and more expensive with no end in sight. F this I'm going to Bali.

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June 25, 2009 at 10:04 AM ×

Oh and on an entirely unrelated point how does one get long Bolivia and their currency? Can't get an NDF offer anywhere. When they start selling all that lithium that's going to be a Kazakhstan quality bubble.

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H(oratio)
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June 25, 2009 at 10:04 AM ×

I have been away several days as my body grew numb and soul became indifferent, watching the peculiar melt up of the eur/usd prior to Tricky's lapping up of well.. whatever anyone wanted to eject in his direction. While one must be steeled to the vagaries of free markets, at my age it is less and less appropriate to process involuntary flashbacks of the progression of one's life. I appreciate the scuttlebut about the mystery ME bid, though I wish you had informed me in advance. So here's a toast to MM's buddies at the SNB, and I hope they shorted a couple of thousand eur/usd contracts before going headhunting.

MM, good stuff, lately. Incidentally, I am hopeful that we will see Murray and Fed in the finals. Nothing from Rafa, but its more pleasant to watch artists at work.

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Macro Man
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June 25, 2009 at 10:31 AM ×

"I'm off to the beach" seems to be an increasingly popular refrain in macro-land.

Nemo, Bolivia is pretty much "trade by appointment"...ie, you find a Citibank or a Santander that has a local custy wanting to buy dollars, and you take the other side. The problem, of course, comes if it goes wrong and you want to get out.....

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June 25, 2009 at 10:36 AM ×

Net exports: $350mm (according to BBG)
Planned lithium production in 2011: 100kt
Cash cost: $2200 (of which very little are reagents - the beauty of brine chemistry)
Today's lithium price $6000/t for LiCO3
So $6000 of cash inflows, and say $500 of outflows for reagents etc. $5500*100,000=$550mm added to your NX line.

It ain't Kashagan/Tengiz etc just yet but its going to get there. This is one of the few things I have a lot of conviction about these days.

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Macro Man
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June 25, 2009 at 10:49 AM ×

I believe there is a similar opportunity in Mongolia vis-a-vis copper...

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June 25, 2009 at 10:51 AM ×

That's true, though Rio and Ivanhoe are getting royally screwed around on that one and the capital spend etc to get it all up and running makes it an inherently longer dated proposition (2014 mine startup at best, according to Ivanhoe's latest update).

That being said, similar circumstance of bad governance, lots of resources and never having heard of the term Dutch Disease.

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H(oratio)
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June 25, 2009 at 11:08 AM ×

Since we are thinking on a Macro level, I would not touch anything that's in Evo Morales' suzereignity if it was someone else's ten foot pole. Viva your revolution, ok pal, I just want a couple of Ballpark franks and a Bud. But like I said, sleeping at night is a peculiar weakness of mine nowadays.

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June 25, 2009 at 11:12 AM ×

I think the FX should be OK, foreign investors in Bolivia not so much. Ultimately its in his interest to get this done - where the Salars are located is one of the poorest parts of the country and all politicians love jobs (not the kind Silvio likes). Couple of pissy small caps to do the lithium trade in Argentina but this is the problem with this trade - very, very hard to find a pure play now that SQM doesn't trade a 3.5x EV/EBITDA.

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H(oratio)
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June 25, 2009 at 11:24 AM ×

Yes, yes, Silvio enjoys le chasse, as the French would say. It must be the Romantic mindset. From what I understood, the Borg and Hideki Tojo were tussling it out for Evo's salt swamps. I do not give advice, but I urge you to think just one more time, if you want to be involved in that.

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Anonymous
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June 25, 2009 at 11:25 AM ×

"Anyone else get stopped out this week? This sucks. Asia is getting more and more expensive with no end in sight. F this I'm going to Bali."

I get stopped out every week, this week maybe a little more than others.

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June 25, 2009 at 11:27 AM ×

Check KZT back into the mid 90s to 07. Nazarbayev isn't really all that different and that one paid.

Hmmmm. Crappy small cap liquidity/political risk in Argentina or Evonomics? I'm hardly spoilt for choice here.

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Brian
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June 25, 2009 at 12:45 PM ×

One commenter said yesterday regarding the 3 figure move in EUR/USD that it was caused by a US house moving 5 yards.

Why would such a big move be attributable to only 5 yards, when according the latest BIS survey, EUR/USD trades 840 yards a day? 0.5% of daily volume drives price 3 big figures?

source:
http://www.bis.org/publ/rpfxf07t.pdf?noframes=1
page 16

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Anonymous
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June 25, 2009 at 12:53 PM ×

"Anyone else get stopped out this week?"

Not me. I am taking the pain. I have managed to avoid much of the minefield with my "Don't even think about trading..." drawer, which at the moment contains mostly Asian risk assets.

"how does one get long Bolivia and their currency?"

There is always the old fashioned way (with a suitcase of cash). :)

MM, I understand your empty "things I understand" drawer. I think mine became empty in 1998 and 1999 as the Nasdaq roared ever higher. I kept telling people it was going back to 1800 (still about fifty percent above the low).

It does contain just one piece of paper right now - one that says "central banks will print money and governments will spend more than their revenues" (laugh if you want, but that first truism proved quite profitable last year).

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Macro Man
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June 25, 2009 at 1:09 PM ×

Nemo, one rather non-trivial distinction between Kazakhstan and Bolivia is that the former rather famously had no external debt during the boom time, whereas Bolivia....does. EM external is the stuff from which currency crises are made. Just sayin'.

Brian, that $840bio is gross volume. FX is a high volume/low margin market where there is very little net flow. A large unidirectional order disturbs that net equilibrium, forcing the price to adjust a fair amount to attract offsetting supply (or demand, as the case may be.)

ANon @12.53, you might want to show your paper to Ms. Merkel!

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Anonymous
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June 25, 2009 at 1:13 PM ×

http://www.grapheine.com/bombaytv/v2/play.php?id=128324

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Anonymous
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June 25, 2009 at 1:14 PM ×

ahh the glorious SNB in bollywood format

http://www.grapheine.com/bombaytv/v2/play.php?id=128324

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Macro Man
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June 25, 2009 at 1:19 PM ×

Anon, just.........beautiful.

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Anonymous
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June 25, 2009 at 1:26 PM ×

What are you guys thinking about 3M Euribor settlements? Seems to me that unless the EU banks way overbid for the 1yr LTRO, 3m Euribor can't fall below 1% for long. If banks are willing to lend to each other below 1%, wouldn't LTRO demand disappear?
And if the banks did overbid for the 1yr LTRO, they will just bid less for the 1m and 3m LTRO's, bringing 3m Euribor back up.
Having said that, the Euribor futures market is telling me I'm missing something here. Anyone care to enlighten me?

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MW
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June 25, 2009 at 1:33 PM ×

"Oh and on an entirely unrelated point how does one get long Bolivia and their currency?"

No idea, but that sort of thing is probably best done with the locals. Gotta love a ccy with the ISO code "BOB".

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June 25, 2009 at 1:54 PM ×

http://www.imdb.com/title/tt0103241/


Alright. Basically this trade is mission impossible, too bad.

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Anonymous
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June 25, 2009 at 2:14 PM ×

Nemo

Getting long the currency in Bolivia is like getting long the currency of South Carolina. Its dollarised. Also, your trade figures are "official" and not real. You need to add the cocaine income, which again dollarizes the economy.

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wcw
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June 25, 2009 at 4:00 PM ×

Does Bolivia still export cocaine? I thought it all came from Colombia these days. Ah, the government has my back in this as so many things: still #3, but primarily supplying Europe and the rest of South America. Viz ondcp.gov/international/bolivia.html

As for the drawers and warehouses, I shuttered my things-I-understand drawer permanently in 1999. Good times.

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Anonymous
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June 25, 2009 at 4:02 PM ×

all bolivia my man

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Hubert
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June 25, 2009 at 4:36 PM ×

MM,

the SNB intervention in $ looks logical to me: in exactly that currency their two big banks blew two holes into their balance sheets. UBS might have lost 50 bn of it. Maybe more. I do not know how far they are covered via SNB with Swaps from the Fed currently (Swap lines are way reduced now)- but when $ looks cheap vs Euro - why not do your intervention in $ and cover what you have to cover anyway one day ?....

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Professional gringo
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June 25, 2009 at 4:37 PM ×

Who dumped their Sterling last night?

I didn't even get a reach around on that deal. Serves me right for not going to the beach.

I'm still holding though.

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Anonymous
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June 25, 2009 at 5:02 PM ×

Apparently, model funds and swiss names on the offer in cable,
for whats its worth...

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jbr
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June 25, 2009 at 5:33 PM ×

I'm willing to bet (uninformed) that you will find logic if you look at the UBS angle to this.

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Anonymous
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June 25, 2009 at 10:18 PM ×

who cares about the explanation? just manage your risk and roll with the punches!

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