Space Mountain

Thursday, August 20, 2009

The worst thing about coming back from a holiday in America is the jet lag. It's been four days since Macro Man returned from the States, and he's still struggling mightily to get to sleep before 2 am. Ugh. Hopefully he can get caught up over the weekend and have a little bit more energy next week.

Unfortunately, markets aren't providing much inspiration thus far upon his return. He referred to the market "roller coaster" yesterday....well, it's continued apace today. It's beginning to feel a bit like Space Mountain, actually.

FX is a particularly fruitless field at the moment. Macro Man has zero G10 FX risk for maybe the first time in history, and frankly at the moment he can't see anything that looks attractive to him on the horizon.

He has a couple of charts to illustrate how difficult that market has been. Consider two of the more consensus macro FX views out there: long NOK and short NZD. The love for the NOK is virtually universal, with something like 4 sellside research groups separately recommending the same exact trade (short GBP/NOK.) The reaction to today's Q2 GDP figure was telling...although overall GDP was much weaker than expected, sellside focus was exclusively on the solid mainland figure. The hatred of the kiwi is longstanding and, if Macro Man examines his own views in the harsh light of day, possibly a little stale.

Anyhow, the street hates NZD and loves NOK. So naturally, NZD/NOK has enjoyed an uber-rally for most of the year.
FX struggles are hardly confined to thematic macro punters. At least we can decide to stay the hell away. CTAs, meanwhile, have to run their models continuously. Their payoff profile is one that replicates a long vol position; in a world where VIX has gone from 45 to 25 over the past 5 months, this has unsurprisingly not been a pleasant time for the trend followers.

The Barclay FX CTA index, shown below, would dearly love to ride a roller-coaster; at least passengers on Space Mountain get to go up before they go down.

Posted by Macro Man at 9:31 AM  

12 comments:

ouch

Nemo Incognito said...
10:31 AM  

It is an obvious point. But the NZD will capitulate (like the All Blacks in the semi-final of the world cup) when the risk-off trade is on. Short NZD will probably be a good trade again soon (hopefully and talking my own book). Although, I agree it is a popular consensus trade - especially against the AUD.

Skippy said...
10:41 AM  

As described to me - the NZD is the turd in the toilet bowl of FX that no matter how many flushes will not go down.
Great post

Nic said...
10:46 AM  

Very true - great line Nic - love it :)

Skippy said...
10:59 AM  

To be fair though MM, nok has been a sell-side favourite most of the year but only really become a "must own" in the last month.

NZD markets in general seem destined to frustrate. Am currently receiving NZD 1y/1y and whilst the carry is great the spot move had been sufficient that there is some red staring back at me.

Tried looking at TWI nzd puts but the vol discount isn't amazing so ultimately all comes down to timing your risk-off move.

I also just bought a 4yr usd call/jpy put k120 with a KO sub 90 for not very much - long-dated topside vol not as compelling a trade as earlier this year post GS hoovering but am happy to aggressively add sub-90 so not too distraught if this gets ko'd.

Anonymous said...
12:03 PM  

MM, and indeed other readers. What tools/applications do people use to monitor their portfolio exposure levels, aggregated greeks of their option books etc...

I use interactive brokers, but other than line items, cant seem to see any decent portfolio "visuals" to track

Anonymous said...
1:10 PM  

We have internally developed systems for all that stuff, other than graphing opton greeks. We use superderivatives if we want to see that (for FX at least.)

Macro Man said...
1:23 PM  

A difficult market to be sure. Never in history have we had a depression grinding down the economy, even as world governments waste trillions of dollars levering up on risk assets. This will surely go down in the annals of history as one of the worst-conceived economic policies ever hatched in the brains of governing elites, but it sure is effective at raising asset prices (temporarily).

In the meantime ... even as markets go up, the economy keeps decaying. I have a little index of how hard it is to find jobs in the US based on the unemployment insurance data -- I count the percentage of people collecting unemployment insurance who leave it each week because they have found a job. This was actually running about 80% of normal through the winter, when we had huge job losses but also significant hiring; downshifted to about 70% of normal throughout Q2; had a brief upward spike in mid-July to 75%, but has wound down to about 60% the last two weeks -- both at the lows for this depression so far. It ain't easy to get a job.

PJ said...
3:12 PM  

I'd like to join the "I hate Kiwi" club, even though my pet peeves are still heavily skewed towards the irrational beast that is sterling.

Dimitry said...
3:28 PM  

Thanks for this very interesting place. May I ask what are the most relevant research group in the industry ?

Vialato said...
4:12 PM  

Worst FX summer in the history of mankind.

Professional Gringo said...
7:24 PM  

NZD might be a turd but its current popularity is testament to its strength. BAC-ML only just went long, it must be good huh; either that or nose plugs help.

Anonymous said...
5:57 AM  

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