Zhou Me The Money

Monday, March 08, 2010

Well, when all was said and done Friday's payroll report wasn't half bad. The BLS clearly scuffled with figuring out just how much of an impact the snow had on the data, but even so with only a marginal adjustment for the weather you'd end up with a pretty decent set of figures.

The reaction in equities and "pro-risk" currency pairs was fairly predictable, though the decent performance of European currencies may have been a modest surprise. The star performer was, of course, the yen complex; Macro Man can only wonder if the absence of trolls on Friday was due to the registration requirement or the fact that they were all stopping out of long yen possys...

In any event, while the strip has rolled over, thus far the extent of the damage has been pretty modest. EDZ0 (the fourth contract, for another few days at least) is currently threatening its uptrend line, but at this juncture is only a dozen ticks or so off its highs. What continues to worry Macro Man about the short end is the amount of positioning in the complex: the lower line in the chart below shows aggregate open interest in the eurodollar strip. As you can see, it dwarfs anything observed in 2009 (during which there were obviously a couple of bum-clenching sell-offs.

Caveat emptor.

Switching gears, Macro Man's email/Bloomberg message box lit up like a Christmas tree over the weekend as PBOC governor Zhou made some comments touching upon the RMB exchange rate. Depending on which news source you read, he either said that Voldy will move the RMB exchange rate....or that he won't (any time soon at least.)

It seems as if we're not at the stage where PBOC statements on the currency are going to be parsed as closely as an FOMC statement (or, dare we say, a Harry Potter story.) Sadly, Macro Man's Mandarin ain't what it used to be, so like all other foreign devils he is reliant on the translation services of others.

Unsurprisingly, the nature of the translation that you get is dependent on the viewpoint of the translator. What does seem clear is that Zhou characterized the unwavering peg of the USD/RMB rate as a emergency, "crisis" setting which differs from the previous "normal" crawling peg.

Of course, that "normal" setting only existed for three years, and we're closing in on two years for the "emergency" regime (in addition to a decade before July '05), so one could credibly wonder which policy really is "normal."

Still, the fact that Zhou is willing to even publicly comment on the exchange rate and muse upon the future of the current regime suggests that change will come...eventually. But while sell-side analysts may froth at the mouth at the prospect of "correctly" calling for a move in the RMB, those who actually have risk on the table are justifiably more sceptical, essentially saying "Zhou me the money", as you can see from the less than explosive move in the 1 year NDF overnight.

The question is: will the US Treasury be singing the same tune (Zhou me the money) when it comes time for the semi-annual report on currency manipulation? As enticing as it would be for China to be named (if not shamed), somehow Macro Man doesn't think that the Treasury has the cojones to do it, just like they haven't since 2003. Perhaps Obama can hire Rod Tidwell into Treasury.....?!?!

Posted by Macro Man at 8:43 AM  


You'd think that politically Barry is going to face stronger pressure if jobs continue to evaporate or just fail to appear. Those payrolls may take the pressure off for now.

....then again, the less pressure the more China is likely to act. It's a bit like getting children to eat their greens.

Nemo Incognito said...
9:45 AM  

Well, all I can say that the appeasement policy in terms of "greens eating" just means that the children do what they want.

The confrontation policy is very unpleasant for a short period of time, with a lot of tantrum throwing, but you can at le3ast effect a permanent change in behaviour if you stick to your guns.

Seems to me China's been "coughing" their sprouts into their napkins for a long time now.....

Macro Man said...
9:49 AM  

I'd agree on that and your analysis but I am very much of the opinion that Barry is as far as you can get from a "gloves off, fight's on" kind of guy that you need in this situation. Dick Cheney, your moment has come and now you are nowhere to be found......

Nemo Incognito said...
9:52 AM  

what about the "voiding" of local government guarantees for projects in China. It looks like a huge deflationary event to me (1.6 trillion USD borrowing according to Victor Shih) ? If it cools the Chinese economy, the Chinese Central Bank will be less eager to revalue its currency, Am I missing something ?

Charles said...
10:30 AM  

Last time this happened the banks tanked, but then the state run AMCs came to the rescue and took all the loans of the balance sheet - note that those AMCs have had really poor recoveries on their portfolios and yet keep on having their financing rolled..... as always the PBOC and government will be the ultimate holders of the bag, though this will probably take a while to percolate through the market.

Nemo Incognito said...
10:48 AM  

Don't they have to actually move the currency to qualify as "manipulators"? Just askin'.

RebelEconomist said...
10:50 AM  

RE, one could argue that they HAVE moved it significantly....from where it would be if its price were set by the market.

Macro Man said...
10:54 AM  

Maybe, MM, although since the renminbi is not freely convertible, it is uncertain whether the Chinese people would save more or less overseas in the absence of exchange control than their government presently does on their behalf, and therefore whether its market price would be lower or higher.

RebelEconomist said...
11:09 AM  

it will take a while to percolate through the market... but it could percolate much faster in PBOC management craniums (crania ?). If local infrastructure investment goes down (or slows) because bankers start to actually look at projects cash-flows the old fashioned way, it may not be a good time to revalue the currency.

Charles said...
11:11 AM  

Slightly off topic but today seems like the first Monday in a while that the mini's haven't been ramped.

@ Charles... I thought the "voiding" would be bigger news also.

I wouldn't like to be rolling a long HG position for a provincial client on swap

Rossco said...
12:05 PM  

in usa futs, the currencies have moved to june 'M' as front today...the EC has the 'nr7' setup, same setup that helped the ES CL GC achieve the 'trend day' last friday...

in BP the weekly candle looks decent for an excess low, and that low was at a key .618 fib...with everybody and their brother short sterling


deke said...
2:15 PM  

Magic Monday certainly late arriving in London and NY. Did anyone see this story on the infamous "cash on the sidelines"? Perhaps an important statistic in a "liquidity-driven market" (is there another kind?).

Mutual Funds Cash at 3%

Leftback said...
3:13 PM  

...Now EUD/USD has dropped from the 150 level in last November to the current 136 level. This is a nearly 10% drop. After the same period, USD/JPY kept flat, though not in a straight line. Despite all the doom talk on EUD recently, EU exporters were probably enjoying the currency movement very much. On the other hand, Japanese central bank over the weekend will reportedly extend a funding program which allowed commercial banks to borrow money at 0.1% rate from the central bank to purchase the government bonds. USD/JPY began to move up as the result (the recovery of the equity market is another reason). But the net result could not be clearer: USD is now the relatively strong reserve currency. I would guess that U.S. exporters are calling the White House right now.

What next? Nobody wants to be the one left holding the bag. Apparently, U.S. can put pressure on China. There are several occasions in the next few months that U.S. can use its leverage. With the huge trade deficit, it is politically popular to do so. But economically, I am not sure that it will help U.S. very much right now. The low-end labor intensive production specialized by China is not going to move back to U.S. Countries such as India, Vietnam, and Mexico could easily take China’s place as exporters of cheap goods. Thus, U.S. trade deficit will not change a bit...

econobserver said...
7:06 PM  

"Maybe, MM, although since the renminbi is not freely convertible, it is uncertain whether the Chinese people would save more or less overseas in the absence of exchange control than their government presently does on their behalf, and therefore whether its market price would be lower or higher."

Uh, isn't that just ignoring the obvious?

Why does Voldemort's Exchequer only buy USD?

When you stick a trillion fingers in the dyke all on one side, is there any doubt which side has higher water pressure than the other?

Matthew said...
10:05 PM  

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