Thursday, September 10, 2009

Trading Places

Trading Places. In financial market circles, it's a cultural icon, and not a day goes by when some line from the film isn't quoted on a trading desk somewhere. When it is on Sky Movies (remarkably often), it's like slipping on an old, comfortable shirt...always good for soaking up a few minutes of viewing, and it never fails to raise a giggle or two.

Certainly it is a more realistic portrayal of finance than the utter dross served up in BBC2's "Last Days of Lehman" drama last night. Macro Man and Mrs. Macro could only stomach about ten minutes of it, and were forced to turn it off, gagging, as "Hank Paulson" launched into an impassioned soliloquy in the Friday night gathering of Wall Street chiefs. The dialogue was straight out of Eastenders, and Hank himself was portrayed by the same chap who was the crooked police captain in L.A. maybe the producers got that call right.

In any event, Macro Man has Trading Places on the mind. Last night saw the release of the altest monetary policy statement from the RBNZ, which kept rates on hold, acknowledged the uptick in the data, noted the excessive strength of the NZD, and stated that rates would be kept at current levels or lower through the end of next year. Alan Bollard subsequently offered some pretty explicit remarks that the NZD should be weaker.

Certainly the bounce in the TWI has been impressive, though it's failed to reach prior highs. The currency is pretty clearly a concern, given the ongoing size of New Zealand's current account deficit as a pecentage of GDP. Reading between the lines, Bollard would like to tighten rates, but feels constrained by the level of the kiwi dollar. While the RBNZ has done some half-hearted intervention in the past, they've made no real sustained efforts to systematically weaken the NZD.

Now compare that situation with, say, Korea, where the BOK offered some fairly hawkish commentary overnight, observing that the economy should maintain momentum and that inflation should begin to pick up. This was naturally taken as a signal that rates could begin moving higher, and 1y swap rates ticked up 16 bps. Yet the scuttlebutt on the ground is that even if and as BOK hikes rates, they will seek to prevent the KRW from rising too much through the same kind of intervention that has contributed so much to the well-being of humanity over the past 6-7 years.

That the RMB hasn't budged for well more than a year is a signal that BOK's view is hardly unique. Somewhat unbelievably, over the past year the NZD TWI has, in aggregate, fared somewhat better than the Asian currency index (ADXY), despite the fact that NZD isn't exactly a wonderful carry trade any more.
So on the one hand, we have a CB governor of a large c/a deficit country who'd like to tighten but won't because of strength in his currency, which he feels powerless to counter. On the other, we have Asian CB governors who, in aggregate, oversee large c/a surplus economies that may or may not tighten policy over the next few months, but are fighting pretty damned hard against domestic currency appreciation.

Winthorpe, meet Valentine. Valentine, meet Winthorpe.

If only we could play the role of the Dukes and put Dr. Bollard in charge of, say, the BOK, and have the BOK governor manage policy in New Zealand. Perhaps then we could avoid re-inflating the global imbalance bubble that was a contributory factor to the whole mess that we've found ourselves in.

And maybe, just maybe, those two would cross paths at some future APEC meeting. Macro Man can just imagine how the conversation might go:

"Looking good, Billy Ray!"

"Feeling good, Louis!"


Anonymous said...

How much worse does the c/a of this inconsequential country have to get before markets sit up and take notice. NZ is addicted to residential property and has a NIIP fast approaching 100%.

RET said...

Well written macro Man - you've made me smile this am!

Crisis Management said...

Maybe NZ catching a flight to safety bid? Well, at least one skittish blogger, author of the popular Cryptogon blog isn't taking his chances:

"The system is in collapse now. This is my best and only advice: Get into a situation that eliminates your reliance on luck and minimizes the impact of factors that are completely beyond your control. Do this immediately.

I no longer live in the United States. New Zealand is my wife’s home country. I moved there with her in March of 2006. We live on a small and beautiful farm, grow organic vegetables and raise livestock."

Nemo Incognito said...

And another chinese SOE product gets slapped with a big ol' tariff. I'm still expecting this trade stuff to descend to this level by December/Jan:

Anonymous said...

the following is going around from yday from a website called forexlive ;)

The rumour is that the IMF is the big buyer in EUR/USD and has been for the last week. This is related to the China deal worth $50 billion which is to be translated into SDRs. What this basically means, is that the IMF needs to buy 13.5 billion EUR/USD and the market has gotten wind of this fact and is front running. All the big players are now long but the IMF through the BIS will not chase the market, preferring to sit on the bid. I believe that they were hoping to buy a lot more than they actually got yesterday at 1.4460/75 area and it is likely that they will raise their bid, albeit not appreciably. The deal done yesterday with India may also require more EUR/USD purchases, this time to the tune of EUR 2.5 billion.

China is paying for the bonds with remnimbi. that means it is a trade (if any) of remnimbi vs sdr basket weights. (usd 44%, eur 34%, yen 11%, gbp11% …if i remember correctyl) also, noone really knows what the imf is planning to do with the yuan in the first place. what am i missing here?

Macro Man said...

The rumour is a load of crap...China hasn't given the IMF $50 bio worth of RMB in one slug, and the IMF isn't going to currency hedge its SDR risk anyways...

But What do I Know? said...

How about the "cultural reference" investing theory? In the movie, Jamie Lee Curtis has all of her money in T-bills (conventional wisdom at the time--the movie presents it as an indication of her financial savvy)--just before short rates were about to plummet (I know, she still made money, but she would have done much better in long-term Treasuries.) If they had made the movie in the nineties it would have been tech stocks, and 3-5 years ago it would have been real estate. Would it be gold coins today? Or rhodium?

Macro Man said...

New Zealand dollars, per Crisis Management!

Nemo Incognito said...

But What do I Know?: I have your answer. Bond certificates for the new yuan bonds which will be printed on rhodium. You heard it here first.

In other news, BOC Vice President calling out bubbles everywhere. Enjoy it while it lasts, this might be the last we hear from the guy.

Anonymous said...

MM, btw how does this all go down, imf bond purchase with yuan. can u or anyone have more color on this? tia

Anonymous said...

I thought the only difference btw the yuan, the new zeland dollar and the korean (won?) is that the sky bot computers can only trade the new zeland dollar...

Charles said...

In Davos in January, the same Zhu Min said :
"Yes, you will see some NPL increase, but it's not coming back in a big way. It's manageable, it will not cause a big financial impact for the major banks,"
"The whole banking sector will do this according to its own rules and by its own risk management process. I think today, all the banks are very careful -- they review those projects and make their own decision, decide what to do and what not to do"

own rules and own risk management process, Mmmh, that is reassuring !

Anyway, he has been superseded by Wen Jiabao himself. Nothing must move before the Republic's anniversary I guess

Anonymous said...

I am curious why UK bank mortgage rates keep increasing vs repo rate, swap rates.

Surely this is just a big re-tightening of credit by the private sector, repo rate and QE be damned?

Why are there so many property bulls out there? Doesn't really make sense to me; credit tail wags the property price dog along with consumer attitudes to being long bricks and mortar.

Have those attitudes changed? Still seem to be the usual pile of property programmes on it the UK...

Anyone got any other opinions?

Macro Man said...

Anon @12.48, the market assumes causality the wrong way. Rather than China giving the IMF $50 bio worth of RMB in one slug in exchange for bonds, in point of fact the IMF will call on China to give it a maximum of that amount on an as-needed basis over the course of one year.

The IMF actually has issuance limits (15 bio SDR per month) that suggest it would take nine or ten weeks for China to get $50 bio equivalent. The agreement was signed last week, so obviously there's not been nearly enough time for any meaningful issuance yet...even if the IMF needed the dough (and we don;t know whether it does or not.)

In any event, my understanding is that the IMF takes the view that it will not hedge the FX risk as the SDR is, after all, just an accounting mechanism and not a real store of value.

Anonymous said...

thx mm, yes my understadning is after doing some research that the imf will pass on the yuan to the next candidate who requests a loan..then the country will go to china to get usd (rmb is not convertible), and it will be up to them whether to hedge it back to sdr weights on run usd risk. imf has sdr on both sides of ledger.

spagetti said...

off topic (sorry for that) but would love to hear others' opinion here on this forum

doesnt it feel like another sh.storm about to hit CEE ?
the Zloty so far considered a bastion of prudence and a safe haven is melting down, HUF probably will follow. im hearing of a story there, that they are trying to relax the self-imposed fiscal prudence for next year..

anyone, any views ?

Anonymous said...

spagetti, poland fiscal oulook is not rosy at the mom, SP statement this mrng didnt help either (us house bought a chunk eurpln just before the headline..hmm). hungary on the other hand is strict about budget ceiling and no issues with financing at the mom it seems.

spagetti said...

anon 3.02

thanks.. on hungary, what i heard is that they are specifically trying to relax their self-imposed fiscal ceilings, giving the governement an option to increase spending beyond the official budget. heard this from locals today. i think they are voting on next year's budget now, and are trying to smuggle in some changes to whats been enacted last year, prohibiting the spending increase beyond the budget, save some specific circumstances such as higher interest cost on fx debt, due to fx movements

as for poland, you may be right, and it was just noise. on the other hand it may stir up the cosy perception that all is well in poland.

sinxe i think the whole usd-down / equity + gold up momentum game is about to hit the wall, i think this will redraw attention to fundamentals. and hence CEE could be in for a rough ride in the weeks ahead (much like most risky assets)

Crisis Management said...

Bloomberg: BNP Paribas wrote in a note to clients today. “We recommend selling Polish bonds across the curve.”

Was there a few years back, almost all the buildings were grey. A bit dystopian, very nice people however.

Somehow piling more ailing countries into the euro doesn't seem like such a great idea at the moment, not for them and neither for the existing basket cases in the euro.

Anonymous said...

On €$, whatever happened to the 1.44/1.3950 DNT SAFE rumour and how does it play with the blast off we had on Tues?
Don't see us running out of steam just yet, S&P could close 1100 if we break Aug highs conclusively.
Thanks for the Trading Places refs!
Randolph Duke: Money isn't everything, Mortimer.
Mortimer Duke: Oh, grow up.
Randolph Duke: Mother always said you were greedy.
Mortimer Duke: She meant it as a compliment.

Macro Man said...

The structure was real (though whether it was SAFE or A.N. Other< i dunno)..certainly there were stops there and classic barrier type market behaviours. Hard to sy that it's wholly responsible for the move, given that a new range high will always draw people in, especially people gagging for a playable theme to make $$$ in Q4...

leftback said...

The Tsy curve shallowing we talked about over the last few weeks is happening big-time now, this would usually be consistent with a weaker than expected economy and low inflation going forward.

Nemo Incognito said...

Commodities coming off and the steel-related complex getting hosed - check out LME Nickel: I'm keeping my position but copper could be last (and biggest) to fall.

Seems like the equity guys going to be the sucker at the table when this all falls apart. All we need is 3/4 of bonds, commodities, equities and credit to get this joke and we're off. I'm hoping this bank guarantee expiry and some of what I am hearing about in EE commercial mortgage land will come out sooner rather than later.

Nemo Incognito said...

At this point in time I understand Chinese market dynamics, commodities and little else. The ex-China equities bid is baffling. Anyone who can get some answers from some long only guys please, do tell.