"Step right up, step right up, come in and see the show! Today's spectacle features some labour market data and a quarterly inflation report from a green and pleasant land!" If markets were a funfair, one could imagine the carnie calling out these lines while standing in front of his tent, urging punters to take a peek inside.
In reality, of course, the Carney is both huckster and star of the show; if his presentation doesn't "delight and amaze" his audience, at the very least he can be sure that they won't ignore it altogether. UK monetary policy is (or should be) rapidly approaching the sharp end of the stick, and recent press reports suggest that today's QIR will open the door to a pre-election rate hike. Although such a development would not come as a massive surprise, in the short run at least it could propel UK fixed income a bit lower.
Although it pains Macro Man to say it, as he ran a steady short in the UK front end for much of the last year, it does look as if a lot is in the price. The sixth-contract spread between the UK and the US, for example, has recently surged to its highest level of the forward-guidance era:
At the same time, Macro Man's model of 5 year swap rates looks pretty fairly priced. Although the UK economy appears to be booming, inflation has fallen sharply. As we know, as a matter of principle Woodforditefrauds adherents cherry pick the variable that most strongly endorses their predetermined course of (in)action.
At the same, sterling seems quite strong by the standards of recent history. And so it is...until one looks on the chart to remind oneself of just how badly it performed in the aftermath of the crisis, and how little it has clawed back. Unsurprisingly, the TWI has a reasonable medium-term correlation with economic output. With the NIESR suggesting that the economy grew 1% (non-annualized) in the three months ending in April, the argument in favour of a strong pound looks pretty reasonable.
If cable at 1.70 feels a little tough to swallow (though not as tough as 2.00, obviously!), EUR/GBP could perhaps offer a happy alternative. Although it's at its lowest level since early 2013, that 6th contract spread between short sterling and euribor is at its widest level since late 2007. And back then , dear readers, EUR/GBP was just pushing up through 0.7000. If things break right, EUR/GBP could conceivably fall 10% over the next 6-12 months.
Only two things scare Macro Man about this set up:
In reality, of course, the Carney is both huckster and star of the show; if his presentation doesn't "delight and amaze" his audience, at the very least he can be sure that they won't ignore it altogether. UK monetary policy is (or should be) rapidly approaching the sharp end of the stick, and recent press reports suggest that today's QIR will open the door to a pre-election rate hike. Although such a development would not come as a massive surprise, in the short run at least it could propel UK fixed income a bit lower.
Although it pains Macro Man to say it, as he ran a steady short in the UK front end for much of the last year, it does look as if a lot is in the price. The sixth-contract spread between the UK and the US, for example, has recently surged to its highest level of the forward-guidance era:
At the same time, Macro Man's model of 5 year swap rates looks pretty fairly priced. Although the UK economy appears to be booming, inflation has fallen sharply. As we know, as a matter of principle Woodfordite
At the same, sterling seems quite strong by the standards of recent history. And so it is...until one looks on the chart to remind oneself of just how badly it performed in the aftermath of the crisis, and how little it has clawed back. Unsurprisingly, the TWI has a reasonable medium-term correlation with economic output. With the NIESR suggesting that the economy grew 1% (non-annualized) in the three months ending in April, the argument in favour of a strong pound looks pretty reasonable.
If cable at 1.70 feels a little tough to swallow (though not as tough as 2.00, obviously!), EUR/GBP could perhaps offer a happy alternative. Although it's at its lowest level since early 2013, that 6th contract spread between short sterling and euribor is at its widest level since late 2007. And back then , dear readers, EUR/GBP was just pushing up through 0.7000. If things break right, EUR/GBP could conceivably fall 10% over the next 6-12 months.
Only two things scare Macro Man about this set up:
6 comments
Click here for commentsMM, thanks for sharing. I certainly enjoy your missives. Watching for Carneyage today ;-)
Replyagree completely your view. EUR is way overvalued Vs GBP. I think the "fair" value should be 1.40/1.50 Eur for every GBP.
ReplyRampagingruss says:
ReplyEuro is the new yen (ie a widowmaker currency) - Given the already big move in sterling - and the likely hood that once the market realises that Carnie will NEVER put up rates, UK bond yields will fall and the sterling will tank versus Euro - IMHO. Shorting sterling v Euro here looks good to me.
Great day for: being long rumors of the small army of "ECB sources" dropping NIRP hints
Reply12;12,
ReplyYup.Where did we see Carney's previous life:
"Easy Money Men. Mark Carney and Jim Flaherty have been scolding us about debt. But are they to blame?".
http://www.macleans.ca/news/canada/easy-money-men/
A stud quote for our times:
Reply“I don’t know what money means anymore,” said Asher Edelman as he exited halfway through the [record $745 million] auction.
http://www.bloomberg.com/news/2014-05-14/francis-bacon-portrait-of-companion-fetches-80-8-million.html