When will the profit-taking come?

One of the sad realities that Neil highlighted in his recent guest piece was the propensity of markets to take profits swiftly whenever there is a decent move.  Part of this is of course a function of the aimless nature of macro in a zero interest rate world; part of it is also a function of the "five minute macro" mentality that so many punters embrace (willingly or unwillingly) as a function of their risk management framework.  No doubt some of it is also the various "puts" sold by central banks which tend to push assets back towards some mean.

Regardless, at a charity golf outing on Monday Macro Man heard several anecdotes of profits being taken in the euro after a whopping 3.5 big figure move.  Of course, 3 days is a full market cycle in 5minutemacroland, and positions have no doubt been subsequently re-added.  Yet with major event risks looming, Macro Man cannot shake the sad idea that a deeper bout of profit-taking might be in the offing.

Sterling, for example, is following the precedent of CAD in 1995 almost to a T, weakening to its lowest level several days before the referendum, then drifting slowly higher.  Yesterday's poll result obviously gave cable a kickstart higher;  with that weekend gap looming at the time of writing, what odds that we close it before the referendum just to screw everyone who sold last weekend's poll result?

Eurodollars, meanwhile, continue to dribble lower on the back of the SF Fed research paper released the other day.  Macro Man regards that as little more than doublespeak- a regional Fed research department doesn't necessarily speak for its regional President, let alone the FOMC as a whole.   Just ask the freshwater economists in Minnesota, who were eventually sacked by that notorious monetary smackhead Kocherlakota for disagreeing with him!

Anyhow, the usual-suspect contracts are now at levels that have generally held over the summer.  EDZ5, for example, has much liked it below 98.90, except for one brief foray that ended with the Fed's blase policy announcement on July 30.

In the "good old days" of 5 years ago, of course, when you saw a trend emerging you hopped on it and added as it went your way.  Obviously, in a mean reverting world that's not the greatest idea...especially when everyone else is taking profits.  Of course, there's the rare exception to the rule (USD/JPY in 2012-13, for example), which perhaps unsurprisingly have been prime sources of macro returns when they occur.

Nevertheless, it's been a good run over the past six weeks, and with the Scottish vote and the Fed in the pipeline, it would be surprising to see those with profits not cash in at least a few of their chips. As always, the trick is to figure which trends have been noise and which are set to continue.  For choice, Macro Man likes Z5/Z6 steepeners in EDs, and prefers USD/JPY to cable....