Well, Macro Man whiffed on the ECB about as badly as he could have. Not only did they announce an ABS program (the inevitable leak did occur right as yesterday's post went to press!), but for some reason they decided to cut the key rates by another 10 bps.
Now, you know as well as your author does that there is not a single individual or institution in Europe that would say, "Well, at 0.15% I wasn't sure if I could afford the loan, but now at 0.05% I am ready to rock'n'roll, baby!" On the other hand, there may well be banks that would say, "Well, we could take out x in the TLTRO, and it will only cost us 10 bps to park it until we find someone to lend it to. Wait, it now will cost us 20 bps? Hmmm...maybe we should cut our bid by 30%...no use paying more to sit on cash than we do to borrow it."
Of course, perhaps the real reason for the rate cut was to submarine the euro. If so, Dr. Aghi's plan worked admirably, with EUR/USD evidently sustaining its largest single day decline in three years. Now, there has been some querying as to whether the euro's decline might make the Fed uneasy, thereby altering the monetary policy outlook.
Colour Macro Man sceptical. Just yesterday, the US announced a trade deficit of $40 billion, which while being more than your author has in his sofa cushions, is pretty modest by the standards of the US. The magnitude of the moves observed so far are pretty miniscule in the grand scheme of things (USD/JPY is unched since December 31); given that the US is still a relatively closed economy, the trade weighted exchange rate would have to move a hell of a lot more before it began to impact the models in any significant way.
Obviously, for the US to cry foul at someone else's monetary policy undermining their exchange rate would be the height of hypocrisy, but somehow that doesn't feel like a particularly strong factor in favour of the argument.
Today of course is payroll day, with all the associated noise and fanfare. For what it's worth, Macro Man's payroll model anticipates a slightly lower than expected result of 210k jobs, versus the consensus of 228k. On the face of it, that might prove to be a slight disappointment.
However, yesterday's price action (as well as some of the macro returns for August) would appear to validate the poll result that punters are gunning for a stronger dollar. As long as today's figure isn't abjectly weak (and with data of this dubious quality, that's by no means a given), one would have to think that the trend would continue- there would be strong arguments for a lower EUR/USD and higher USD/JPY on each side of the equation. Insofar as FX over the last few years has largely been an exercise in sifting through turds to find the least repellant sample, finding a compelling fundamental support for a trend move in G10 FX is like a welcome breath of fresh air.
Price action will be key. There are a lot of shops still underwater, and if this is the big trend for the end of the year, there shouldn't be much by way of pullbacks. The Abenomics trade in 2012/early 2013 didn't let anyone in and punished the profit takers. That's the way macro used to be, but the last few years have bred bad habits. Macro Man is very curious indeed to see which way the pennydrops after this figure.
Now, you know as well as your author does that there is not a single individual or institution in Europe that would say, "Well, at 0.15% I wasn't sure if I could afford the loan, but now at 0.05% I am ready to rock'n'roll, baby!" On the other hand, there may well be banks that would say, "Well, we could take out x in the TLTRO, and it will only cost us 10 bps to park it until we find someone to lend it to. Wait, it now will cost us 20 bps? Hmmm...maybe we should cut our bid by 30%...no use paying more to sit on cash than we do to borrow it."
Of course, perhaps the real reason for the rate cut was to submarine the euro. If so, Dr. Aghi's plan worked admirably, with EUR/USD evidently sustaining its largest single day decline in three years. Now, there has been some querying as to whether the euro's decline might make the Fed uneasy, thereby altering the monetary policy outlook.
Colour Macro Man sceptical. Just yesterday, the US announced a trade deficit of $40 billion, which while being more than your author has in his sofa cushions, is pretty modest by the standards of the US. The magnitude of the moves observed so far are pretty miniscule in the grand scheme of things (USD/JPY is unched since December 31); given that the US is still a relatively closed economy, the trade weighted exchange rate would have to move a hell of a lot more before it began to impact the models in any significant way.
Obviously, for the US to cry foul at someone else's monetary policy undermining their exchange rate would be the height of hypocrisy, but somehow that doesn't feel like a particularly strong factor in favour of the argument.
Today of course is payroll day, with all the associated noise and fanfare. For what it's worth, Macro Man's payroll model anticipates a slightly lower than expected result of 210k jobs, versus the consensus of 228k. On the face of it, that might prove to be a slight disappointment.
However, yesterday's price action (as well as some of the macro returns for August) would appear to validate the poll result that punters are gunning for a stronger dollar. As long as today's figure isn't abjectly weak (and with data of this dubious quality, that's by no means a given), one would have to think that the trend would continue- there would be strong arguments for a lower EUR/USD and higher USD/JPY on each side of the equation. Insofar as FX over the last few years has largely been an exercise in sifting through turds to find the least repellant sample, finding a compelling fundamental support for a trend move in G10 FX is like a welcome breath of fresh air.
Price action will be key. There are a lot of shops still underwater, and if this is the big trend for the end of the year, there shouldn't be much by way of pullbacks. The Abenomics trade in 2012/early 2013 didn't let anyone in and punished the profit takers. That's the way macro used to be, but the last few years have bred bad habits. Macro Man is very curious indeed to see which way the pennydrops after this figure.
24 comments
Click here for commentsWith all due respect, banks do not take the TLTROs to make loans. Loans are made on demand and create deposits. Yours is a common misconception.
ReplyDon't you think the price action of the Bund, compared to the Euro is somewhat weird?
ReplyTo me, the Bund at these levels is pricing some (high) odds of sovereign QE, and that's what the selloff post ECB suggests. So why has the Euro collapsed that much? After all the ABS program was already pre-announced. Is it as you suggest that people are seeing Draghi and thinking Abenomics and short JPY trade?
So far at least the amounts in the QE plan are not the same at all! And institutionnaly I doubt that the Germans are ready to let BoJ monetization in the European framework. At least we need to wait for the Oct 8 EMU meeting.
That being said, I definitely agree that Draghi wants to see a eur at 1.20 and might get it soon, but the short positionning if only seen through the open interest and futures is massive already... Where will the momentum come from?
Please lighten me...
Josh, the intention is that they will use them to make loans- hence the T in TLTRO. Of course, as we saw with the FLS in the UK, applying punitive measures to a liquidity scheme based on loan growth makes the desire to take it up much less. How the ECB presumes to square this with the supposed moral suasion they're applying to banks to take up a lot is beyond me.
Replymacrott, insofar as all the ECB stuff since June has ignited a furious rally in the periphery, the Bund has kind of had to keep up lest spreads get even sillier. Obviously also, the negative depo rate has taken the Schatz negative, thereby dragging down yields in the rest of the curve.
As for the euro, Occam's razor suggests that it is a primary concern. For many quarters Draghi pooh-poohed it, saying it was in line with long term averages...then suddenly and consistently raised the exchange rate as a concern. Futures positioning merely captures a subset of participants, namely trend following CTAs, who are short because it has gone down.
Is there more room for sales amongst other leveraged names? Yes. Is there more room for sales amongst real money investors? One would have to think so.
The TLTRO allocation will be a big deal I think...if the allocation is smaller than expected/hoped for...that could at least temporarily reverse some of the downdraft.
Concur with you statement about the rising level of curiosity.
ReplyI remember back in my day when thrown at the desk , and unwillingly too!..the weekends were horrific ,and I spent them the best way knew how :)
Goodluck if you can keep up that!
That end of year dollar rally just hit a snag ;) , ouch!
Replywow the Euro didnt rebound much on that big miss employment number. I am surprised. lets see how the rest of the day pans out
Replywhats going on the GBP, cant buy a bid all of the sudden
Txs MM, very helpful, I didn't realize these issues of peripherals / core / shatz - catch up. And will definitely look at TLTRO allocations as a chance to get in.
ReplySo if I may, I have a few additional questions…
1/ In your view what's the current probability - if any - of sovereign QE priced in?
2/ Do you think sovereign QE is needed at all? I constantly read that the next step is sovereign QE. Correct me if I am wrong but the amounts I have heard of are 700bn/1trn for the ECB programs txs to the TLTRO and bond purchases, to be compared with the $1.4trn program of the BOJ. Okay one might argue that the TLTRO doesn’t affect the monetary base, but frankly does anyone shorting the Euro care? So the current programs (TLTRO, private bonds) should be largely sufficient to push the Euro toward 1.20.
I am asking that because it seems to me that the main other possible opportunity to get into the trend – apart from disappointing TLTRO - would be hurdles before the sovereign QE announcement. As that seems to me to be the big difference with the JPY/Abenomics trend in the sense that the "momentum of policy announcements" (to take Soros’ concept) might not be smooth here.
Txs
Marcottt - The BUND may also be pricing in an element that the SNB will have to continue buying foreign assets to defend the peg EUR/CHF 1.20 peg. The difference this time vs. the last ~485 bln they bought is that they are buying for a lot higher price. One could take this a step further and argue that fixed income prices may incentivize the SNB to buy more equities this time around (think 85 of the 485 bln is stock already?).
ReplyMacro Man - think too many looking at this as an ECB-FED event when they need to broaden their scope and include ECB-BOJ. Point being, if the Euro-Yen (EUR/JPY) moves 5-10 big figures lower that will pose a real problem for Kuroda. Remember, Germany is the country Japan is trying to export deflation to as Japan can no longer be the "shock absorber". So in theory ECB-BOJ is dual race now against FED.
At the risk of being too cute on a portfolio construction one could argue that the tug-of-war in EUR/JPY is more of a tie (give or take some) than people think into Q1 next year (i.e. sell a strangle), especially if Japan politics into Dec take a turn for the worse. Conversely, profile in EUR/USD and USD/JPY is supportive for more linear move in USD (i.e. buy EUR/USD put and USD/JPY call), especially as interest rate differentials now widen possibly more than most expect. Just talking more out loud than anything else...
Fed's Kocherlakota: US interest rates are not low enough
Reply"There are a lot of shops still underwater, and if this is the big trend for the end of the year, there shouldn't be much by way of pullbacks".
ReplySo so on the money... So many people lost money on day one this year, there is NO WAY they can miss this rally...
marcott- I struggle a bit with sovereign QE in the EZ. Beyond the legal hurdles (which are considerable), what would it be meant to achieve? Sovereign bond pricing across the region has already taken yields to levels where they are no impediment to borrowing, and wouldn't necessarily do anything to ease credit spreads to SME borrowers.
ReplyRF- this is why I cited the $ as the big trend. For choice, I gues I'd assume EURJPY goes a little lower but frankly struggle to have a strong view on that one. Dollar uber alles, as the saying goes.
Kocherlakota is a fraud. He sacked the research group at the Minny fed for disagreeing with him, and seems to think that low rates are a panacea despite no empirical evidence supporting him. In a committee full of hacks and frauds, he is perhaps the worst.
How many decades has the world survived 6% unemployment with 0 central bank stimulus? What are they really afraid of?
ReplyAs noted here (possible ad nauseum), the long-term postwar average for US unemployment is 6%. Of course, the Fed has chosen a differnt metric to look at now that this one no longer suits the a priori conclusion. There's a reason that proper scientists view "social science" as little more than scattering chicken bones and waving a faux magic wand....
ReplyClassic example on NFP: There were 91 forecasts and the low was ~190k vs. 142k actual, i.e. "economists predict not because the know but because they are asked to".
ReplySomeone just sent me an interesting observation worth sharing (Hat Tip: Michael S.)
"August NFP notorious for seeing upward revisions down the road...Aug revisions over the past few years in chronological descending order: 33, 54, 122, 12, 0."
We did see a rather sharp(e) reversal in USDJPY and DX. I wonder if the consensus EoY trade has already tripped at one of the early hurdles?
ReplyMost people are looking at rates the wrong way. In the QEasy countries, Japan, US, and others to be named later, rates will stay low not because of the economy per se, but because those governments CANNOT POSSIBLY SERVICE THEIR DEBT at higher rates. Once you view the problem through this lens, it becomes a lot easier to keep it in focus. Now if you look at Europe, you realize Spain and Italy do not have direct control over the Euro and hence rates, and Germany doesn't have the same debt imperatives, so the tug-of-war over ECB policy is likely to continue.
NFP was yet another Bud lite number, f**king close to zero. In an economy of 200 million people, small variations around a mean of 200,000 mean absolutely d*ck. This economy is flat as a pancake, a landscape familiar to an Iowa farmer, where even a 100 foot hill takes on unusual significance as the highest point in the county.
Interesting thoughts Right Field and MM re JPY vs EUR. The competitive race to the bottom also puts a lot of pressure on dollar pegged countries, most specifically China (though Middle east with dropping oil rev cant be so happy either).
ReplyChina has its own internal re balancing and while a strong currency is better for consumers it will be necessary to watch the manufacturing PMI's. If all this money printing can bring some growth then the end game wont be so soon. But if JPY and EUR cant get thier economies out of the funk, for which so far there isnt any conclusive evidence, it could start to get interesting soon.
Buy stoxx/sell spoos seems to be the trade now
So leftback, enlighten me why the US cannot service their debt at higher rates?
ReplyLast i checked i dont recall seeing many floaters on issue and last i check the funding requirements is also shrinking quite rapidly.
And now that you mention Cable Abee Crombie, i mean do we really believe the Scots will leave UK? i mean after almost a 10 big figure sell off, surely the risk reward favors dipping ones toe in? And while we on the topic of FX, will someone please explain to me wtf is aud doing up here??
Sorry, anon, we really meant to say they don't want to be ISSUING any more long term debt at higher rates. It was a bit early in the morning and our macro brain was still micro.
ReplyC Says
ReplyBack in my distant youth we had a name for female 'Draghi's'...cock-tease. Forever promising more than they will ever deliver. The numbers look uninspiring to me and the big question ;will they reverse the propensity that people have to paydown debt and increasing their saving (hoarding)? I very much doubt it. Probably ensure the TLTRO is well attended sooner rather than later, but so what? The issue is will it find its' way out into economic activity ,or simply stand there stagnating. We're in that Alice in Wonderland world where you can borrow if you don't need to ,but if you need to you can't ,because the banks care about their balance sheets like never before.
Keep your knickers on again Draghi , what you've got to show isn't worth seeing. Fiscal policy anyone.
Have to agree with there , C..the stimulus levels in anticipation for that trade truly has had its day..
ReplyTake it away Moby..
https://www.youtube.com/watch?v=KvOtsotu6Cc
It's all good..92,269,000 Americans, 16 and older, not in the labor force. I mean who needs workers? That's so "old school".
Replyhttp://fistfulofeuros.net/afoe/secular-stagnation-part-iii-the-expectations-fairy/#more-10495
Replyabout Draghi hoping to QE motherland BTPs vs. Germany:
Reply"Naturally in the short term the “Mario Draghi ultimately has my back” feeling will still prevail, but with markets continuing to finance debt levels that any official study will soon have to recognize as unsustainable lack of proactive policies from the ECB will only fuel concerns that the size of the pill may become just too big for the bank to persuade Germany comfortably swallow, leaving the specter of private sector involvement to once more rear its ugly head. How do you tell people who have just sacrificed hard to get their debt under control that they are now about to help “pardon” 50% of someone else’s. It simply doesn’t make sense."
Edward Hugh
agree @Cv
Reply