Wednesday, May 04, 2011

Lost in FX space

To be completely honest TMM are dashing around playing catch up after time-out over the UK bank holidayfest.  Wasn’t the Wedding lovely?  The UK's weather has been absolutely stunning over the last 2 weeks and we have to say that, if it were to be predictably that glorious, there would be little need to holiday abroad.  What a shame we all had to return to work!  Of course, our Big Country cousins in the US have been working diligently throughout (TMM have wondered if there is any real correlation between number of holidays and real productivity), but that diligence seems to have done little for the state of the US dollar.

We have come in to find that the world has changed little.  Chopping the head off the Hydra of Al-Qaeda is not a global market mover, though it has been a field day for the Armchair Special Forces experts and those who play video games with names like "Call of Duty - Abbottabad".  However, TMM assume that Bin Laden isn't really dead until Donald Trump has seen the death certificate.  Is "Donald Trump for President" part of the "Gordon Brown for Head of IMF" joke?

But we are interested in what has started to happen to some of the normal USD indicators.  We had a flash crash in gold 2 days ago and silver puts have gone "Pippa Middleton" (no one had bothered with the little sister of Gold Puts until after last Friday, when they went monster bid).  Silver's collapse may be blamed on it "Bunker Hunt"ing itself again with an increase in margin requirements bursting the specs' bubble, but its demise should still be a worry to the dollar bears

For the past 2 days we have seen the interesting spectacle of Asia time zone buying USD, but Europe and the US reversing it.  The same with equities.  So why is Asia selling risk and carry, while the West is buying it? Shouldn’t we be listening more to Asian sentiment as they are the ones who are driving the flows these days? Through all this the Euro is riding rampant, up against even the mighty AUD.

So what of Europe?  The "vinaigrette" currency is riding a wave of ECB policy and the resultant impact on the curve (EUR 10yr yields are now higher than USD) and, of course, the world's favorite creditor is still stuffing the periphery scaremongers.  Has the premium for pork in China led them to buy European PIGS? But what they give with one hand in buying the debt they take away with the other by forcing the currency against the weaker economies.  TMM wonders if the European economies can recover enough before the ECB rate rise program takes them back to the stone age.  Germany's figures today may be the first sign.

The UK data is looking crap and TMM are most concerned that yesterday's UK figures looked leaked again.  If the SFA were doing their job properly you would see their squad cars screaming around the city and snatch squads smashing in doors at addresses in Cardiff and London.  Instead they are just doing the equivalent of handing out speeding tickets.  Together with EUR's rampage EURGBP is now flirting with 0.9000.  Another reason, apart from the weather, to stay at home this summer.

So put that lot togther and we would like to say that the USD's run down is showing signs of abating in some assets, but we are torn.  Whilst, as is pretty clear from the above ramble, we are pretty lost in FX space, we think we should try and grab ahold of something -  so we are going to don the kevlar gloves and buy some USDJPY and sell some EURGBP.


Anonymous said...

Sometimes after a good run on risk there are times when just stting and counting the cash is not abad idea.I accept for money managers that might sound like investor PR suicide ,but perhaps they need abtter class of investor rather than a sounder reason for ebing out of the market to agreater extent.

Right Field said...

Sell-Side Advocating Wrong Trade...Travel Hopeful Into Friday -- Factually, the USD (DXY) or Asian Dollar (ADXY) Indices have not reversed but due to the speed and degree of the weakness in Silver or divergence in correlated Equity sectors or markets to Crude Oil (i.e. Russia first -10% market correction off highs today), the sell-side is arguing that the short dollar and long risk trade is of higher probability of reversing in the short-term. The added catalyst is a strong employment set on Friday that will accelerate US interest rate expectations.

The problem with this view is multi-faceted. First, the ECB meets tomorrow and EUR/USD shows little sympathy to this view as further hawkishness is expected and most forget EUR makes up ~58% of the DXY basket. Second, the majority of non-investors only view a correction within in the context of a USD short covering move that would include EM and DM Equities as well as Commodities. What they forget is the period in between the time that EM FX strength due to inflation morphs into a growth scare due to demand destruction. Personally, I believe we are entering the period where the next EM FX move higher takes place (negative EM Equities, not commodities) and Bernanke remains committed to no change (positive US DM Equities and flat/positive commodities). Third, weekly Jobless claims have done nothing but trend the wrong way over the last 4-weeks (key NFP measurement) and ADP data this morning was not USD supportive. Point being, what if NFP disappoints on Friday and the USD gets crushed (more likely scenario in my view). Next, most believe positioning against USD is very stretched. This is misguide as only CTA’s have a true position due to trend. Macro professionals and discretionary long/short are no where nearly sized properly if trend was to continue. Finally, US Fixed Income yields are only grinding lower and show no propensity to agree with a strong USD at the moment.

Conclusion: It is more likely EMG Equities correct and US DM Equities attempt to hold on the index level due to the weightings in the sector rotation. The end result of rotating out of early cyclicals into later cycle or reducing some of the extended length in Energy can be more than offset by the continued buying in defensives. The risk actually becomes that Financials participate higher, the sector weighting is 10% higher than Materials which would skew SPX even higher.

Leftback said...

Agreed with Anon at 1:19. There's just not a lot to like here, so why not sit?

RF: Agree that the ongoing rotation from EMs to DMs will continue in equities, with EMs under inflation pressure and raising rates (hence the recent FX trends may extend). In addition, US equities may not correct a great deal as the ongoing rotation from reflation trades to defensives continues. By the same logic, it will be difficult for US indices to rise significantly while mining and energy undergo what may be a large correction.

We continue to view fixed income as vulnerable to even a modest upside surprise in US employment on Thursday and/or Friday.

Leftback said...

The rotation RF refers to may already be well under way according to data from Bespoke:

Rise of the Defensives

Anonymous said...

I can't even beging to pick the holes in your post there are just too many to with brevity.

Anonymous said...

I see it the same way.Defensives and lower US yields appear to suggest an overall struggle for the index psuhing against overbought overweight sectors.

Leftback said...

Does this qualify as a Magazine Cover Contrarian Indicator? (It would be better if it was Time, I suppose..)

Dollar At Forty Year Low

Leftback said...

Yield Watchers Anonymous presents an another edition of Let's Find Some Yield...

DVY 3.28%
TNX 3.22%

FVX 1.93%
SPY 1.73%

Gold 0.00%
Silver heh heh....

Hmm, I may be a tool at times, but this doesn't seem like the basis for a major sell-off in equities. A failure of your regularly scheduled program on Financial Armageddon and The End of the American Empire to begin on time might actually result in some people selling the lower yielding entities listed above and buying dividend-paying stocks here.

Anonymous said...

would you not imagine a sell off of any significance in equities might be accompanied by longer yieleds falling due to offering a reflection of lower growth and thus lower expectation of rate threats. Combined with a safe haven if equities are viewed has overbought.
Moreover defensive buys come later in most cycles for obvious reasons and of course when we say defensive we're not saying they make you money .In a real sell off all they do is lose you less.
I have no idea if we are going to get another move down of weight,but I see nothing in what you discussing that would make that likely ,or indeed unlikely.
To me it just looks like treasuries are repricing growth slowing and equities going defensive may be doing the same.
Let's face it energy and commodities at these prices are deflationary on most sectors not plugged into them .They act just like a rate rise to the consumer.

Right Field said...

Anon - re your post "Rightfield, I can't even beging to pick the holes in your post there are just too many to with brevity."

In the pursuit of spirited debate and to make us all smarter, can you please take the time to expand on your post? You clearly have time to read this blog and post a comment.

abee crombie said...

ISM NON leaked today as well... 9:57 EuroStoxx and S&P started dumping

any number that isnt from the BLS is leaked these days

FX said...

Methinks a lot of pre-posturing has happen in the last month in various markets,most notably our pain this going to be a fake out(macro data)within a QE cycle al la 2010(GDP 3.7-1.7).It's been noted(hindsight) around the traps that the economy was pulling its self out of that mini(lol)slump before any "wealth" effect could've taken place in regards to QEv2.

Methinks the market won't be ready to throw out the baby so quickly as last time,there may even be some type of acceptable convergence conforming in this pending slowdown.....QE cycles are a lot like racehorse cycles,everyone is unique and their always up against ever changing cycles.

ps.....Next time your boredshitless,TMM, go and see a real racehorse in your neck of the woods.

Leftback said...

Anon @ 5:32

I think a substantial slowing is already priced in with Treasury yields where they are today. The likely economic surprises are therefore going to be to the upside from here, resulting in some dislocation if yields rise and the dollar rises alongside, which in turn would precipitate some unwinding of dollar carry trades and some selling of the reflation trades.

The likely beneficiaries of selling of Treasuries and reflation trades might be the less USD sensitive sectors like utilities and consumer staples, which are already moving up, perhaps in anticipation of such a rotation. Believe it or not there are still some under-priced stocks among the

Tradebot said...

Nothing new here... I can't see anything that will change the market dynamic of lacklusture US growth / loose monetary policy from Fed / weak USD / strong EM trend.

Pretty hard to see equities breaking the trading band, Treasuries seem to on a holding pattern until QE2 goes and USD keeps getting hammered every time Bennie B opens his mouth. EUR seems to be propped up by "watch how hawkish I am" pep talk from ECB as political manouvering from France/Italy are taking place to get Germans on board for Draghi's appointment.

Me thinks the best risk/reward is probably on shorting treasuries as Mr Market is expecting Bennie B to hold into ad infinitum and ignoring the end of QE2 plus a lot bad news of US growth - unless things get a lot worse bonds are priced to perfection.

Anonymous said...

Maybe I am missing something her, but overall this looks like a very simple risk off story.Depth we don't know,but certainly outside the US equities markets appear to be signalling risk off.
Cash looks good to me.

Anonymous said...

Were I of a mind to short treasuries I would not be doing it when money appears to be running away from high risk assets classes.
Bit like stepping out of the way of the car to get hit by the bus.

Tradebot said...

yes, I don't think the time yet to short treasuries - bit like trying to catch a falling knife. but if i would be forced to choose a trade for next 6 months, the short treasuries would have best risk/reward. I can't see a 50bp downshift in yields without QE3 (politically impossible) but 50bp rise is well possible when US inflation starts to pick up... signs are already there...