The Biggest Week of the Year (redux)

(Shift-F9), though it would no doubt be churlish to point out that the 'melt-up' has occurred on fairly dismal volume in both cash and futures.

It's yet another version of "The Biggest Week of the Year TM" this week, with both the ECB and payrolls queued up for the market's trading pleasure on Thursday and Friday.  Although Macro Man doesn't have time today to scroll a lengthy piece, a few of his thoughts are sketched out below.

* After the lengthiest song and dance since "In-A-Gadda-Da-Vida",  it must surely now be put up or shut up time for Draghi and the ECB.  After last month's "subtle" foreshadowing, expectations for the ECB to deliver something are now virtually universal.   A rate cut remains far and away the most widely held forecast, though a significant minority of punters evidently think there's a solid chance of something more substantive, such as a QE-type program.   Macro Man remains sceptical on the latter score; that the ECB is circulating discussion papers on how to boost securitization merely confirms that there is insufficient paper for them to engage in large scale asset purchases quite yet.

* Today's CPI is forecast at an ultra-low 0.6% y/y.  If the figure comes at or below that expectation, it should provide sufficient cover for another staff forecast downgrade, which itself will be the excuse for justifying policy action from the governing council.  Given Draghi's comments in March, Macro Man can only wonder how the staff will shift the "December 2016" numbers.   Of course, if CPI shocks to the upside, there could well be a few euro shorts/fixed income longs that come under modest duress.

* Although five data points is hardly statistically significant, it is nevertheless interesting to see what markets have done into and out of prior ECB meetings this year.  As the table below indicates, yields have tended to rise into the ECB and decline immediately after (at least partially a US payroll effect, no doubt.)  The euro has exhibited a modest tendency to rally during and after the ECB announcement.  Given that BOBL yields are down 13 bps and the EUR nearly 3 big figures since just before the last ECB meeting, it would hardly shock to see the pattern hold this time around as well.

* Eurodollars have failed where they were "supposed" to, e.g. the November highs.  It will be interesting to see if 10's and bonds can maintain a bid tone if ED's trade on the back foot this week.

* A similar analysis to the one above suggests fixed income might struggle until Friday, at which point it will trade very well indeed.   Interestingly, Spooz have rallied from Tuesday to Thursday before payrolls every month this year.  (Of course, it is a given that Tuesday's a winner, innit.)

* 1 month USD/JPY is now at all time lows.  6 month vol, while not at all-time lows, is at its lowest level since Mrs. Watanabe was in her heyday in 2007.   Macro Man doesn't know when the next 6 vol move in 1 month yen is going to be, but he has pretty high conviction on which direction it's gonna be.

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Click here for comments
June 2, 2014 at 8:22 AM ×

Cannot wait to trade the vol in the Usd/Yen.

PS..hows it go? its INVIGORATING!lol

June 2, 2014 at 8:43 AM ×

Ay Amplitude ... FX vol looks like suppressed fireworks here and it is almost New Year's eve.

Nice preview on the ECB too MM, buy the rumour, sell the fact has never been more apt in my view. I wonder though whether the ECB can engineer that short term interest rate differential to head south in which case the EURUSD would probably start to edge decisively lower towards 1.30. What is the price of a 1.35-1.32 (or something) 3m put spread these days?


Buena Patria
June 2, 2014 at 1:33 PM ×

Hey MM,

What are your thoughts on this?

Something to revitalize the carry trade? (possibly gathering bulls for slaughter as well over time as it gets to be a crowded trade - prone to liquidation to short term market 'jitters' like Cyprus/Ukraine typed risks?)

June 2, 2014 at 5:35 PM ×

Afternoon, MM. That ISM revision was the dog's bollocks wasn't it? Unless you were trading anything a bit rate-sensitive.... another good day to be "observing, but not involved"....


Retail Chump
June 2, 2014 at 10:07 PM ×

@Buena Patria - I reckon we'll see further Yen depreciation, in fact the move started today. There was heavy Yen selling in the FX complex, whilst the ISM shenanigans, and Apple's keynote, stole all the media limelight...
@Leftback - I was short NQ several lots, and had to reverse pretty sharp-ish on that first ISM revision. The rest of the retail chumps are now re-mortgaging their homes to meet their margin-calls.