China: a change in FX reaction function

* The Fed minutes were largely as expected, in Macro Man's view.  Yes, they said it was a close call whether they moved in September or not, but we kind of knew that already from subsequent speeches and the three dissents.  That some repressionistas favoured quasi-ZIRP, perhaps forever, was also not particularly surprising given some of their speeches.  That bonds reversed earlier weakness over the course of the afternoon was not altogether surprising; on the continuation chart, the long bond has reached another little "corridor of uncertainty" that has marked previous price extremes.

    
* There was a Reuters sources story yesterday suggesting that the ECB will discuss measures such as deviation from the capital key, buying bonds yielding below the depo rate, and potentially increasing the amount of any given issue eligible for purchase at its upcoming meeting.  Of course, policy won't be changed, but these sorts of discussions may lay important groundwork for any policy shifts announced in December.   Bunds remain close to their lows since the September ECB, having sold off nearly three points since the "taper" story hit the wires.  If anything, yesterday's report may represent a small push in the opposite direction.    Macro Man's Euribor spread trade has worked better than he possibly could have imagined; prudence dictates taking something off the table, which he's done this week.


* The UK is a divided nation, and recent headlines will have left half of the country fuming while the other half gives a wry chuckle.  Yes, the word that mega-retailer Tesco has pulled Marmite (a rancid brown slurry left over from beer-brewing that some people inexplicably put on toast), among other Unilever products, from its shelves has made front page news.  In seriousness, Unilever's decision to raise prices on a broad range of products is just the first shot across the inflationary bow in terms of fallout from sterling weakness; this, and ongoing public angst over sterling's decline should certainly raise inflation expectations.



*  Finally, a bit more on China, where moves in the currency continue to draw attention.  Readers may recall that Macro Man broke down the change in Chinese FX policy in early June, observing that this year the CNY largely ignored rallies in the DXY while participating fully in the down days.   During this period, of course, the RMB depreciated steadily against the reference basket.  However, as Macro Man pointed out the other day, the RMB has been broadly steady against the basket in recent times.  Has anything changed?



By way of reminder, let's look at the state of play as of June 10, when your author published his original post:

As you can see, the RMB displayed a high correlation and relatively largely beta when the DXY declined the day before, but little correlation or beta on days the dollar strengthened.  However, you can clearly observe the change in trend over the last three months, when the RMB has gone more or less nowhere versus the basket.  Is this a reflection of the DXY, or has SAFE changed its reaction function in setting the fix?   Turns out it's a little bit of both.

The RMB is still more responsive to dollar weakness than dollar strength, both in terms of correlation and beta.   However, both the correlation and beta of the RMB to dollar weakness over the last three months is substantially less than that observed earlier this year, in 2015, or any of the time periods studied in the post linked above (back to 2010.)  Now granted, this is a relatively small sample size, so it could just be noise or a temporary phenomenon.   Still, given how pronounced the relationship was to dollar weakness earlier this year, it seems unlikely to be a coincidence.   Rather, it seems likely to be more of an overt attempt to reduce volatility and increase stability.  This in turn presumably stems from a desire to limit the type of headlines that might encourage capital flight.

To put the year in perspective, here are the numbers for 2016 as a whole:

As you can see, the overall theme of a skewed response function fits with what we have observed: namely a fairly sharp (by historical standards) depreciation of the RMB versus its basket.  That the reduction in correlation, beta, and skew has accompanied a sideways move in the RMB versus the basket may seem tautological, but it's not; instead, it reveals that for the last few months at least, the reaction function of the authorities has changed from one of active depreciation to one of stability.

Bear that in mind the next time you hear a frenzied report that USD/CNY has fixed at a new high!
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Anonymous
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October 13, 2016 at 9:17 AM ×

Marmite is delicious you heretic!

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Anonymous
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October 13, 2016 at 9:53 AM ×

The poor cousin to vegemite you dolt!

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Fired Macro PM
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October 13, 2016 at 11:40 AM ×

Closed my GBP shorts this morning.

I saw a short opportunity at 1.29 and i took it and now that we have seen a sub 1.20 print, the same folks who didn't see 1.20 in the cards few weeks ago are now looking for 1.15 or even par.

Well I think the bottom is in for GBP for the rest of the year. The short position is highest it's ever been - higher than the immediate aftermath of Brexit vote.

I think there's a good chance of a short squeeze to 1.30 if there's any whif that hard Brexit is not in the cards and May succumbs to pressure.

I think the courts ruling on the 18th may change public perception about whether parliament should have a say.

I think May blinks. And I also think shorts blink first too - it's just way too crowded so many are surely keeping their one eye on the exit sign.

1.29 to 1.21 just made my year. My YTD was sitting at paltry 3% for the year prior to the trade.

Now that I have some decent amount of fresh powder, I'll be punting here on the long side of gbp at 1.218.

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Fired Macro PM
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October 13, 2016 at 11:43 AM ×

Also cashing in on my AUD shorts here as well from two weeks ago.

With day at 98, now is the time to go flat on the long dollar trade

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Fired Macro PM
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October 13, 2016 at 11:49 AM ×

DXY at 98*

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Skr
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October 13, 2016 at 3:27 PM ×

Anon 9:23

Buying bread from a man in Brussels
He was six-foot-four and full of muscles
I said, "Do you speak-a my language?"
He just smiled and gave me a Vegemite sandwich
And he said....(All together now)

I think emini is going down under
Where puke does flow and men chunder
Can't you hear, can't you hear the thunder?
You better run, you better take cover
Yeah

https://youtu.be/8jHXu86O01w

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Panda
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October 13, 2016 at 5:55 PM ×

@ Fired Macro PM: Nice ride down with cable. What's your view on the impact of the Scottish referendum bill being published next week? Would it be better to long the GBP after it comes out?

Oil inventories were way above estimates and yet after the initial gap down it got bid back up over the course of 30 mins. Seems like some players have an agenda.

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Anonymous
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October 13, 2016 at 5:57 PM ×

Congrats to Bob Dylan on his Nobel Prize for Literature this morning!

A classic quote of his from long ago, which today could refer to the Fed and the TooBigToFail Banks:

"The pump don't work 'cause the vandals stole the handle."

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Celeriac1972
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October 13, 2016 at 6:59 PM ×

Looks like 12yo will be with us shortly.....

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12yo HFM
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October 13, 2016 at 8:09 PM ×

@Celeriac1972 - lolz

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abee crombie
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October 13, 2016 at 10:10 PM ×

Thinking about Gold here... any thoughts...

Earning start coming out in a fury soon. So far nothing special, with FAST and AA having some company problems and CSX looking for growth (whats new, an optimistic CEO)

JPM will set tone for financials. The biggest threat is still a big wreck in tech but I'm not sure it will happen this Q

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Anonymous
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October 13, 2016 at 11:36 PM ×

off topic - looking at this Milken HF panel on youtube

https://youtu.be/4IDyyq5Hh2k ...

Ken Griffin: 37 mins:35 secs: "Frankly you can't succeed in the markets today unless you are part of a great team. the days of a single person, a bloomberg, I am going to have an idea and I'm going to win, those days are history. The team is the essence of how you win today."

Guys, you lot on here would know...is that true? Are all the Paul Tudor Jones/Soros/Niederhoffer style one man heroes cleared out now? Is it impossible? If so, why? Robots? momentum not working any more? Do you personally know one man operations churning out £5m+ from one man operations (either managing their own stack or for a few risk taking HNW investors) on a consistent basis year in, year out since 08, or is Griffin correct this set up is impossible in the modern era? If so why? Can it be done? Sure there are some old guys still sitting in their chairs but are they just playing for fun now based on a past stack built during the Nineties/early Noughties or can they still do it?

Are the still PTJ one man super heroes proving it still can be done? (Not including prop/principal risk trading off flows in a bank, ie mean guys locked in a room with a Bloomberg and maybe a couple of IMs to old mates only)...can this sort of outfit still make it, do you know people who actually still can do it from this sort of set up year in, year out or is Griffin on the money in this clip? Leave aside the regulatory hurdles and institutional attitude - I am just asking do you feel it's still possible for a lone ranger to prove it's possible for a sustained period?

Be lucky, Harry.

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washedup
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October 14, 2016 at 12:50 AM ×

@anon 11:36 - ironic, since griffin isn't exactly the poster child for a 'team player' - throwing money and collecting brains vs inspiring true loyalty are two different things.
That said, he is a brilliant and insightful man, so this deserves some thought. I think the one man edge should, in theory, be correlated with markets that reward independent thought more than they reward technological edge or size of capital (which in turn buys access to central bank largesse) deployed. I also think (intuitively) that there would be a positive correlation with structurally high volatility, which has most certainly not been the case for the last 2-3 years. There is also an element of zero sum, in that since large institutions move in herds and engage in groupthink, the probability of individuals not belonging to them succeeding, by definition, goes up when they get decimated., which is the case when you get 1000 year floods.
So Is the current environment permanent? Could be - for personal reasons I hope not.

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Anonymous
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October 14, 2016 at 1:13 AM ×

I think one man investors (2-5y time horizons ) can outperform. One man trading shops seem to be much more difficult.

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johno
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October 14, 2016 at 8:32 PM ×

Harry @ 11:36 -- Ken Griffin. His returns have sucked, for years. He blew up in 2008 too. Now he's saying what works and doesn't. Whatever. Being small you can flip your positions in seconds. You don't have to run a complicated book of hundreds of positions with unstable covariances. You can wait for the fat pitches. These are material advantages a small, individual, but professional player has. Aside: I'd avoid thinking of anyone as a hero in this business. Heroes tend to blow up anyway. Niederhoffer? Pathological gambler. My advice is to keep track of every trade you do and do postmortems on them. The best teacher is experience seen objectively.

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