Short End Musings

Friday, March 05, 2010

OK, first things first. Sadly, the last few days have seen the emergence of a particularly boorish class of troll in the comments section, all of whom appear dedicated to proving the proposition that half the world has a double digit IQ. While Macro Man does not enjoy moderating/deleting abusive comments from cretins, neither does he wish to see himself or this space overrun by drooling vermin. He has therefore decided to impose a registration requirement on comments; while it may prove irksome for regular commenters to register for some sort of OpenUser ID, it will hopefully separate the wheat from the raw sewage, so to speak.

And now, on with the show. Today sees the monthly sacrifice at the altar of statistical noise, the US payroll figures, and there seems to be a school of thought that last month's snow will depress the data artificially. While this may in fact be the case, the recent rally in fixed income suggests to Macro Man that risks lay in the other direction.

White/red eurodollars seem to be extremely well-populated; given that, it was very curious indeed to see effective Fed funds tick up to six month highs yesterday. There were all sorts of stories circulating, from limiting GSE lending in FF to domestic institutions to the withdrawal of the GSEs from the funds market altogether. Either way, effective funds (and by extension, LIBOR) bear watching; from Macro Man's perch, the strip is already priced to perfection.
While focus in the US and Europe remains on the (admittedly glacial) progression of exit strategies, in the third member of the G3 the policy bias is rather in the other direction. The Japanese press is full of leaked stories today that the BOJ will expand its extraordinary measures to "support the economy", which an observer might reasonably translate as "weaken the yen."

However, it is not immediately clear that extending/increasing term lending in the money markets will have much, if any, impact. The US- Japan 3 month money spread is more or less zero, and is currently bounded at just 25 bps in favour of the $. Moreover, the relationship between LIBOR spreads and USD/JPY is indifferent at best; the weekly correlation since 2000 is 0.33, but as the scatter plot below demonstrates, there is a pretty wide dispersion of regimes. (The current observation is in red.)
Ten year swap spreads have historically had a much stronger relationship (corr = 0.57) with USD/JPY, both because of the correlation with outward bond flow and given the veritable Fuji of toxic exotic structures that link the exchange rate with swap yield differentials.
To be sure, there have been different regimes in the swap differential- USD/JPY relationship as well, but the link has generally been much stronger than with front end yield spreads. As you can see, the current observation shows USD/JPY as cheap against both the linear and polynomial regressions by some 5-15%. So while the literal impact of an extension of BOJ policy might be limited, the signalling value might be greater. Of course, all bets are off until the end of the month, with reams of JPY reportedly scheduled for repatriation under Japan's HIA program.

As that flow runs its course, however, 'twill be tempting to have a pop at the long USD/JPY trade closer to the end of the month, though for many punters it may be a case of "thrice bitten, fourth time shy." Macro Man can only hope that the recent proliferation of trolls is amongst them....

Posted by Macro Man at 8:16 AM  

23 comments:

Interesting thoughts on USD/JPY MM.

The trolls just show that the one true bull market is in "societal acrimony" and that it is somewhat secular.

Manc Trader said...
9:50 AM  

Testing this registration thing. 1, 2 1 .. 2 , hello can you hear me ..

Well done MM, if you hadn't leaned round and slapped the kids fighting on the back seat the stress levels might have caused a crash.

Richard said...
10:03 AM  

Metals and crude refusing to give in after a short test of 6200 in Cu and sub-70 in wti a while ago. WTI spot very much function of SP500 and $/EU rather than any oil fundamentals it seems. Wti's vols very steady and flat around 30'sh for all of cal10 now. Shorting 60/90 strangles is almost a no brainer.But how long will that last?

P2 said...
10:37 AM  

A plethora of equity brokers in Asia today pushing upside structures on NKY based upon a weakening Y and BOJ forced liquidity finding its way expressly to the stock market. Hmm. Maybe bracing for 84 in March as the chart suggests (to me at least) is right.

Rossco said...
10:48 AM  

Thats what the chart says to me too Rossco.

Nic said...
12:04 PM  

nice technical analysis!!
Thank you.

I'd be pleased if you exchange reciprocal link with me.

forex-cat said...
12:39 PM  

FYI, after LS's comments on jobs and snow, Joan McCullough looked at both the establishment and the household surveys' definitions of employment, and the ability of snow to impact the numbers is pretty close to zero.

Scott Frew said...
1:06 PM  

the first move is up in stock indexes and crude oil and USD..in usa futures we have the narrowest range in 7 session setup(nr7) for ES, crude oil and precious metals, and long bond... so finally a volatility expansion day likely!

TGIF~
-deacon

deke said...
1:36 PM  

Until Wednesday, JPY/USD was near its Nov-Dec 2009 level. As I mentioned on March 4, there was no reason for JPY to be so strong at the time. Greece debt became the old news and U.S. equity was on its upward trend.

I am thinking that the next interesting subject in March would be US long bond and MBS. How will these assets do when Fed’s MBS purchasing program is expiring? It seems to me that market currently does not give it much a thought as mortgage rate is still near 5%. Considering the deep negative pending home sales in Jan, I suspect that there will be some down side surprises waiting for us in fixed income market.

econobserver said...
4:13 PM  

Ah, I like what you've done with the place MM. Open, airy, very comfortable.

Curious how one digs up the information about seasonal yen repatriation. Is that inferred from another source, or listed somewhere?

k1 said...
4:48 PM  

I think we all had a good laugh at your expense Macro Man. Not only have you made enemies of those not currently under left-wing hypnosis, but you have actually discredited yourself amongst those you consider to be on your side.

Unbeknownst to you, this blog has become a laughingstock on account of your maniacal superiority complex, which you have betrayed quite inelegantly in recent days.

Joe Sixpack said...
4:54 PM  

I, by contrast, was shocked by our host's tolerance. Though I almost enjoyed being reminded always to keep Larry Summers famous there-are-idiots dictum in mind.

I've been thinking of short yen, but you may count me among the twice-shy brigade. Not because I shorted yen, but because my currency timing seems always and everywhere to be abysmal, even when I get the call itself right. Gr.

wcw said...
5:04 PM  

"If of ten men, nine are recognizable as fools, which is a common calculation,' says our Intermittent Friend, 'how in the name of wonder will you ever get a ballotbox to grind you out a wisdom from the votes of these ten men? Never by any conceivable ballotbox, nor by all the machinery in Bromwicham or out of it, will you attain such a result. Not by any method under Heaven, except by suppressing, and in some good way reducing to zero, nine of those votes, can wisdom ever issue from your ten." -Thomas Carlyle

(props to Mr Moldbug for both the quote and sending me here sometime ago)

Thank you for sharing your thoughts and ideas on global macro trading. I greatly enjoy reading them.
Good choice in the switch to subscriber-ship. I think it can only improve things.

5:36 PM  

Good luck with the new system. Let's hope you can keep the peace around here.

Longer term outlook for JPY is obviously poor as Japanese debt:GDP ratio > 200%, but that doesn't mean the currency can't rally significantly before it all falls apart.

Leftback said...
5:48 PM  

K1, the repatriation estimate is from Japanese banks who are in a position to anticipate the flow.

Joe, my "side" is that of people prepared to think critically rather than parroting some flimsy ideology. As such, I find myself disagreeing with all phases of the cartoonishly poor US political spectrum. But hey, who needs friends when I have enemies like you?

Thanks to all readers/commenters of goodwill who took the effort to register. Hopefully once the bum fluff floats off to some other destination, a useful, lively dialogue can re-emerge....

Macro Man said...
8:21 PM  

It feels better already around here.

Thanks!

dss said...
9:01 PM  

The short end certainly took a spanking today, and the long end too. It's likely we will see more of the same early next week into the Treasury auctions.

Leftback said...
9:08 PM  

Registration was my trade of the week. Good to have this as a contributors only forum again.

Nemo Incognito said...
5:14 AM  

HI, MM

I've been long of Dollar yen for months now patiently waiting a break up higher (not pop) because of my opinion that the Japanese have nothing left other than to QE in size.


I'm also long a cpouple of their banks too.

jcambria said...
11:35 AM  

I'm trying to get long USDJPY it's a tricky trade to enter but to me it looks like the tide is turning. Thanks for your post.

Sion said...
9:49 PM  

re USDJPY ..
if it stays 'risk on' (how i hate to use these words, but its really how the mkts work right now thanks to the 5minute macro culture)
so if its risk-on its a no brainer that USDJPY goes up, along with rates

if its riskoff though, it might still go up, as a risk off environment might be triggered by a move higher in rates (i know MM you still of the view that the bond conundrum goes on)

the differnce between the 2 scenarios is the timing and spped of an usjpy move

so unless we get a sharp spike in volatility i think rates grind higher, and so does usdjpy.

but i think we might first get a spike in volat and a drop in equities sometime in march. and thats when usdjpy should find its bottom

well.. a lot of if's and assumptions and no confirmation of any sustained move so far. its the time for range traders now, which im sadly not

spagetti said...
10:50 AM  

Personally I'd be tempted to trade it by buying dips in chf/jpy myself. SNB's / BIS's actions clearly seem to be adhering firmly to the law of diminishing returns, in no small part I guess due to the stunning level of apathy that they seem to be bringing to the table, coupled with bouts of, erm, ineptness (intervening in Asia time when only one man and his dog can see their credit anyone?.....)

If for no other reason than the sheer novelty value (especially for anyone under a certain age, but even for the rest of us) if and when the MoF / BoJ do flex their muscles again I would expect the result to be a little different.....

Pascoe said...
2:00 PM  

Btw - saw this piece on the efficacy (or otherwise) of previous efforts and the merits of 'smashmouth' style vs the proverbial cloak and dagger....

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1549486

Pascoe said...
3:08 PM  

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