Shhh! Don't look now....

....but USD/CHF is pretty much back to flat on the year and has almost entirely wiped out the SNB move.....


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Anonymous
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March 10, 2015 at 11:49 AM ×

FT says:

It will be the short of the century, eventually, before QE4 (Q3, at the earliest, more likely Q1 16).
Until then, target 1.12/1.17.

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Macro Man
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March 10, 2015 at 12:03 PM ×

Your faith that past performance is indicative of future results is touching, if misplaced....

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Leftback
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March 10, 2015 at 12:21 PM ×

Nice one, MM. I think you were riding that one?

Major correlation breakdown today. USD and SPX no longer in lock step. A while ago a wise man (or Team of Men) taught me this indicates a change in FX regime. Is it time to buy JPY, with 122 as a stop?

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Anonymous
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March 10, 2015 at 12:22 PM ×

FT says:

Time will tell...until then, I stand chastised.

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abee crombie
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March 10, 2015 at 12:34 PM ×

EM FX going nutty today. BRL & ZAR are taking it on the chin but Asian countries also getting hit, SGD, IDR and KRW..

uh oh.

I havent even paid attention to CHF.. hmm a sell up here?

Headline on my bloomy, S&P sells off as Dollar gain on Fed bets. MM, when is the divergence between the Eurodollars and the EUR start coming home?

US HY sold off the past couple of days as well but in line with US equities.

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CV
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March 10, 2015 at 1:18 PM ×

Nice one MM, I think you are buying the USDCHF with both hands here ... negative rates, are, well, negative rates! And if Yellen really wants to be a harda**, well I can tell you there is plenty of liquidity out there to accommodate the USD bid.

Supranational bonds in the Eurozone are being issued with negative yield now, this is normal folks, have no fear. I fear China much more than I fear Yellen, though, but both of these could of course drive pain in EM.

Meanwhile, when do EM corporates realise that they can issue debt/refinance in EUR ... ?

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washedup
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March 10, 2015 at 1:53 PM ×

"Meanwhile, when do EM corporates realise that they can issue debt/refinance in EUR ... ?"

Sure CV - as long as the original debt wasn't in USD - the overall portfolio impact of exacerbating the USD strength as this catches on could turn out to be doubly painful - kinda difficult to turn $2 TN of USD denominated debt into EUR debt without creating some repercussions don't u think?

Im out of usd length for now, but mainly just waiting for it to get off the front pages - the next leg of the move up will be driven by corporate hedging.

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CV
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March 10, 2015 at 2:08 PM ×

Of course Washedup, there will be no "easy" switch of batons here. The Original Sin still bites, and hard! The only thing is that US yields/rates are hurtling lower even as the USD screams higher (or vice versa probably), so yes, I see cash flow problems for companies earning in <> but rollover/refinancing risk?! Global capital markets are fragmented, but not that much.

Either bund yields are too low, or rates in Brazil are too high. A bit of both perhaps? But there is an arbitrage there that will be traded away eventually. Anyway, this does not preclude more short-term pain of course ... downwards and down we go.

Good point about corporate hedging too! That flow should pick up with Q1 earnings one would suppose, no?

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Leftback
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March 10, 2015 at 3:26 PM ×

Bunds at 20bps, isn't this where the van shows up outside the banks and the men in white coats come and take the bond traders away?

"Yes, sir, of course! I'm sure it's a GREAT investment at 0.20% for 10 years, now just put this nice straitjacket on, there's a good chap while we check you for sharp objects and prepare the Thorazine...."

This is madness.

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Mr. T
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March 10, 2015 at 3:50 PM ×

This is madness.

Agreed.

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Leftback
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March 10, 2015 at 4:02 PM ×

A market only Franz Kafka or Jonathan Swift would recognize....

"when Grigor awoke he found that he had turned into a giant insect and was buying 7y German debt at negative yield..."

"Gulliver awoke on a distant shore to find that Lilliput had a bond market populated only by issues with an absolutely minuscule yield, which scurried around his prostate body like so many tiny ants.."

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Mr. T
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March 10, 2015 at 4:10 PM ×

One thing I don't understand about euro QE - if they are not going to buy through the deposit rate, they will have no choice but to go out the yield curve to find eligible bonds. Great, long term rates are lower, but now your yield curve is flat. I don't see how that is going to stimulate growth or lending. If anything it seems like it would be an additional strain on eurozone banks. Does this just mean that we should expect additional cuts to the overnite rates? If I thought I knew what I was doing I would put on german flatteners or short eurostoxx or OOM buy calls on short term debt as it hits this (20) ceiling, but none of this makes any sense so I sit on my hands (and watch GDX get ever closer to my stops).

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Polemic
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March 10, 2015 at 4:20 PM ×

Fully agree Mr T re having to go out along the curve. And if they do i can't see how it's helping anything.

I am beginning to feel that the talk of QE did more good than it's actual execution. This could fast turn into a QE QAR QRASH. It's like driving a F1 car by committee and no one really knows the course.

Taking us further into the -ve yield twilight zone is just compressing the inevitable spring of unwinds from this abhorrent state.

But in the meantime we have equities going down because of fear of US rate hike fears and bonds going up because of EU QE. Its nuts m'lord.

Still think both should go don ultimately as we have the next deleveraging saga. Only this time it won't be in personal debt but where that debt went - into state hands so sov debt.

If that debt is associated with its own currency then it will be FX dampened, but where its tied to a 3rd party currency ( EU) all the pain will be in the debt and we will be back where we started in EU.

Be interesting to see who gets the blame. In 2008 it was the naughty lenders who took the social wrap. Next time around I predict it will be the naughty state borrowers who are blamed. Always blame the bigger entity it seems.

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CV
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March 10, 2015 at 4:21 PM ×

Right you are Mr. T! This idea of not buying sub -0.2% is subject to "change" anyway I think. Meanwhile, if you can get your hands on some HY EUR debt, pass it along please ;).

The flow is too large for the market, hence it is leaking out through the capital account via the external surplus (hence why 13% in Brazil right now is very, very interesting!). Of course, if QE is taking out foreign EUR bond holdings, it is very currency negative.

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Leftback
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March 10, 2015 at 4:49 PM ×

We probably have to be patient, as it appears as if with the ECB QE the "front running" wasn't quite as efficient as it was in the US, for example, and the "front running" process is still continuing even after the actual QE event has been initiated.

Before long, however, we must assume that some of these participants (UK based hedge funds?) will say "F*ck this negative yield for a game of soldiers, we are off like Eric Cantona at Selhurst Park" and will see the same results as we did in the US.

Holders of (acceptable) EU govies will sell them to the ECB and those market participants will then (presumably) move out along the risk curve, into such items as Greek govies, for example, into EU HY corporates, and eventually surely into emerging markets such as Brazil, as CV suggests, even Russia (ooooohhhh boo hiss). Once the last of these yield hunting expeditions begins, we should start to see EM FX, bonds and equities all rally
together and that will mark the beginning of the end of Bucky's Run..

In the meantime, there is concern that Bucky has just triggered a mild recession in the US. The inventory/sales ratio is a not negligible indicator and it is coincident unlike the BLS numbers. Right now it is knocking on the door of recessionary territory.

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Leftback
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March 10, 2015 at 4:54 PM ×

Btw, MM, as a Dollar Long, when is USD in bubble territory?. Are we in the blow-off phase already? At what point do you personally see the strong USD becoming a problem as a drag on US exporters and oil producers?

In my opinion, we passed this point ages and ages ago, but I am curious to hear other views. The fact is DX is almost 10% higher than at the nadir of the GFC with all of its attendant fear, yet everyone has been acting as though it's all hunky dory..

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Martin T.
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March 10, 2015 at 5:20 PM ×

Positive correlation between US rates and the USD begins to turn negative, therefore from my point of view thanks to the nice February pull-back I would say USTs are a buy at these levels. The US economy is much weaker than it seems and I don't think Dr Yellen is going to normalize yet...
Best,

Martin

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Macro Man
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March 10, 2015 at 5:55 PM ×

Is the dollar in bubble territory? No way. At best you can say it's overvalued against the yen, probably by a somewhat smaller magnitude than the yen's OVERvaluation from 2010-2012.

Against sterling, it looks pretty fair to me.

Against the commodity producers, it looks undervalued if one is willing to believe the commodity supercycle has turned (I am.)

And against the euro? It's pretty fairly valued, with the proviso that it has spent the last decade being persistently UNDERvalued, courtesy of Voldemort and other FX reserve managers who have now kindly pissed off.

As for Q1 growth: Sure. it's probably going to be weak, given appalling weather in the East and a port strike in the West. Q2 payback should be pretty tasty, though...can you say "pent-up demand"?

That people continue to defend ZIRP (not accommodative policy, ZIRP!) simply astounds me.

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washedup
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March 10, 2015 at 6:20 PM ×

LB - USD is no more in a bubble than crude was at $80-90 or euro was at 1.35 on the way to 1.60 back in 2007. Yes, possibly a bubble in hindsight 3 years from now, but does that matter given what innings we are in?
And are you really surprised people don't get the impact of the strong dollar convexity and what it means? You should be hanging out with long only fund managers, not macro traders to understand the ignorance. Don't look to Janet's crew either, they are rank idiots when it comes to understanding currencies and have proven it time and again.
What's gradually changing is the 'cause and effect' of it - every secular currency move comes in two phases - I think the 'good' part of the USD rally is over, and now it enters the dangerous 'bad' part, where it becomes the bane of CB policy - i would best describe it as changing gears from being a dependent variable (function of relative GDP growth and real rates etc) to the biggest badas$ independent variable out there. The bears seem to mistakenly assume that just because its bad it won't be allowed to happen, when instead its all the more likely to for that very reason.
Completely agree on the commodity super cycle as well MM - I see lots of potential in EM, but don't look too much beyond India for opportunities, and that too not for a while.
Anyway, not a fan of buying 99 RSI products no matter how bullish I am, so i certainly hope people short this back to 94-95 so I can reload!
Left - that was a lot of words - as fair compensation for my efforts i expect you to inform me of the price and date on which TLT is once again a no brainer buy (please don't tell me it was yesterday).

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Leftback
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March 10, 2015 at 7:14 PM ×

Thanks, both.

We will all have to hope that I am better at picking the turn in the Long Bond than I have been with USD. But then my track record with FX is lousy, whereas with rates I have been much more accurate.

We're not there yet, by the way.... Technicals first, weak bounces into resistance that used to be support... chart says wait. Fundamentals, still too many wallies are still short 10s, awaiting US lift-off and multiple hikes this year and will continue to run off into biotech stocks until finally confronted with one last piece of data that goes down like a lead balloon, perhaps as late as the April NFP? Expect to see a capitulation day at some point. We'll know it when we see it.

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Anonymous
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March 10, 2015 at 7:33 PM ×

Farmer,

While MM's opinions on FX valuations look accurate, here is my concern. The previous weak dollar cycle had lasted for more than a decade, which is long enough for real economies (US and other countries) adjusting for this reality. The reality is changing no doubt, but the exchange rate change is ahead of reality right now. A healthy dose of mean reversion is long due and I am looking for the signal of turning right now.

With all ECB and other CB's cats out of bag for now, lots of people have adjusted their expectation to a Fed's June rate raise, and corporate America enduring the pain of strong dollar (they could of course absorb that currency shock given time), what we need is a catalyst: an event or an economic indicator release just timing at the right moment to ignite the sharp reversal.

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Macro Man
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March 10, 2015 at 7:42 PM ×

With earnings, margins, corporate cash levels, retained earnings held overseas, and earnings as a % of GDP all still near record highs, the two words that come to mind vis-a-vis corporate America an the dollar are "boo" and "hoo". To my mind, it makes investing in "macro products" much more interesting than equities at these levels.

As noted elsewhere, there is always the option to hedge, which is no doubt taking place and exacerbating the move. I also cannot stress enough the significance of China et al no longer being a factor in FX markets. It is more than a dozen years since EUR/USD was truly free floating....I think those expecting mean reversion based on data gathered since 2003 might be in for a rude awakening.

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CV
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March 10, 2015 at 8:56 PM ×

Great points MM. I have no issue with a "US dollar bull cycle" as such, but I think it matters whether it is driven by a "strong US economy/Fed hike cycle" or just because "everything else is shit."

The problem is MM that in a world where the ECB and the BOJ never leaves ZIRP, it will simply become more difficult for the Fed to move. As for China, I wholeheartedly agree ... I remember, you know, when you and Setser ran the show on this back in 2006 ;). But how quickly will congress/corporate America etc etc start to moan if China decides to put "rebalancing" on hold and give it a go in the currency wars?

My point is simply that while I can see while the stronger USD/shortage of USD is a bugbear for a lot of assets, themes etc, I think that the US could very well be forced to "supply" a bit of those USDs to stay in the game as it were.

Finally, I also agree with you on macro products and as a provider to the industry, I hope the good ones of them will now be able to hold their own and not just bang their head on a S&P 500 chart going up!

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Anonymous
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March 10, 2015 at 8:57 PM ×

You can lose 4bps in a Germany 7yr note ( plus tons more in Euros ) or you can swap to a 3yr UST and get 1+% in a rapidly appreciating $

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Anonymous
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March 10, 2015 at 9:07 PM ×

Credit Suisse: "Potential for the market hitting "super contango" as US inventories of oil in storage continue to fill up."

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Anonymous
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March 11, 2015 at 1:55 AM ×

BOJ Must Drive Yen to 140 to Nail Inflation Target, Survey Shows ( and most EU leaders want to see .85 EURUSD too )

OK then...125 DXY coming

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abee crombie
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March 11, 2015 at 2:40 AM ×

mm prey tell , how do you play the US economic strength in macro land if not equities anymore. Rates are crap game. Still no movement. So you just have FX. I guess that's the only game in town. But when US short term rates don't move I don't get the reason. I guess the 10yr spread is still widening.

Who is buying all these bunds at 0.20%. I don't think bevan Howard and those of that macro ilk. Seems trend followers love to diversify and play that market. The model is still long and technically no real signs of exhaustion. I'd be careful on the other side of them. Better to find some way to fund in Germany or buy real estate there.

EM fx is the black swan. And all the USD corporate debt they issued.

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Anonymous
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March 11, 2015 at 4:07 AM ×

http://www.reuters.com/article/2015/03/10/us-investing-doubleline-gundlach-idUSKBN0M62DO20150310

Gundlach said U.S. equities markets are signaling that a strong dollar might not be a good thing for risk assets, including U.S. equity markets, as it may import economic weakness and deflation.

Gundlach said currency trends tend to last a very long time and the U.S. dollar has shown no weakness.

Gundlach has kept DoubleLine bond funds in all-dollar denominated securities.

Gundlach said oil prices will drop to a "minor new low," below $43 a barrel, while gold prices could reach $1,400 an ounce by year end.

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Anonymous
admin
March 11, 2015 at 4:14 AM ×

http://www.bloomberg.com/news/articles/2015-03-10/gundlach-sees-blockhead-fed-repeating-european-errors-on-rates

Jeffrey Gundlach said if the Federal Reserve raises interest rates in the middle of 2015 the central bank will have to reverse course. He criticized the Fed for not learning from errors made by global counterparts, which raised interest rates and then had to cut them, and Chair Janet Yellen for spending too much time with foreign officials(!).

That last comment is priceless ...

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Anonymous
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March 11, 2015 at 5:59 AM ×

@LB, thanks as always for your UST insights. Isn't the fact that lots of wallies are still short 10s a good argument for buying?

- Whammer

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Anonymous
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March 11, 2015 at 7:43 AM ×

Some water on Leftback's mills from the Rational Bear Tony Sagami:

"In my home state of northwest Montana, a huge number of men moved to North Dakota to work in the Bakken gas fields. Montana is a big state; it takes about 14 hours to drive from my corner of northwest Montana to the North Dakota oil fields, so that means those gas workers don’t make it back to their western Montana homes for months.

Moreover, the work was six, sometimes seven days a week and 12 hours a day, so once there, they couldn’t drive back home even if they wanted to. This meant long absences… and a good friend of mine who is a marriage counselor told me that the local divorce rate was spiking because of them.

Now the northwest Montana workers are returning home because the once-lucrative oil/gas jobs are disappearing. That news won’t make the New York Times, but it’s as real as it gets on Main Street USA."

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checkmate
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March 11, 2015 at 8:50 AM ×

In amongst the rubble of yesterday I came away with the thoughts that the worst was to be found in US equity and specifically in the dollar sensitive sectors. By contrast core European equity was relatively strong and Japanese equity was a so what event.
Out of that I'd take the view USD events offer the rotation play opportunities into those equities that are clearly receiving a significant competitive uplift from the currency volatility.
I imagine it's not only my eyes on the DXY big round number heading swiftly our way. That I would guess ties in with some approximate parity on the Euro and sets up for deterioration in US data releases .

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checkmate
admin
March 11, 2015 at 8:52 AM ×

I might also have noted that the FTSE being 'dollar' heavy in miners and energy has been my favourite short against which to rotate.

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hipper
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March 11, 2015 at 10:15 AM ×

Uh-oh, panic mode on. Money fleeing from a bound-to-fail socialist experiment.

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March 16, 2015 at 2:58 PM ×

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Bulverde Texas Real Estate

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