Comments on FX


Strong signs of momentum divergence in EURCAD. The rally may well have come too far too fast. A pattern also apparent in the EURJPY chart below. 

 Momentum divergence is a useful indicator, more so than momentum on its own. Using signals generated from simple momentum indicators generally produces a profit and loss account than mean reverts over time. However momentum divergences,  in our view,  have a better track record in identifying countertrend price action. 


GBPCAD too looks like it is rolling over and is due for a period of consolidation. The six-week STDEV has topped out while the shorter-term STDEV is rising off a low level. Taken together it suggests further downside potential for cable. 

A similar picture with GBPJPY with Friday's sell-off not leading to much of a rally in GBPJPY actual vol. 

The unwinding of the so-called Trump trade has corresponded with a persistent MEX peso rally. The peso now seems to be flat-lining above key support. MEX risk reversals, however, remain well bid for US$. 
 

The US$ rally ran into significant topside resistance at the 1.3800 level. However, as US-CAD trade relations seem set to deteriorate in the near term the C$ is likely to remain under pressure. The leg lower suggests a somewhat weaker trading range; with good support around 1.3350 and topside resistance around 1.3750. The volatility of the C$ along with the AUD are very dependent on what happens to the commodity complex in general. As commodity price, vol has been trending lower, in particular, oil, and copper so too has the C$ vol declined. This trend likely continues over the summer, and the C$ may find short-term support from a seasonal rally in the oil price. However, this is likely to change in the fall. 
The chart above shows GBP risk reversals from 2017. 25 delta GBP puts have been steadily losing their premium all year and nearly made it back to par. However, that trend was reversed this week with the most recent batch of opinion polls and GBP move lower. 



   One month EUR risk reversals ahead of the French election touched a low of 4 vols over for EUR puts over EUR calls. Following Macron's victory and the sharp EUR rally EUR RR have traded back up to just over par in the front end. However, like GBP, that trend reversed later this week with EUR puts once again commanding a tiny vol premium over calls. 

The longer term C$ implied & actual vol trend has been lower with occasional short term periods where owning gamma has been rewarded. As you can see from the chart above the 3M actual is testing the 6% level and the implied vol is not too far behind. 6% is historically good support on the charts for 3M C$ vol and my guess is that it will prove a tough nut to crack. 



The rally in the EUR following Macron's election is fully justified. The markets attention is becoming more focused on the unwinding of populist pressures in the EU and the real prospect of a still closer union. Trump's isolationist rhetoric may actually support this along with the departure of the UK. Meanwhile, the big picture is still one of declining vol amid a trading range that encompasses 1.05 and 1.15. 3M EUR vols closed still lower on Friday and are now at levels last seen in 2014. While cheap they can get cheaper still.  
GBP rally back to 1.3000 has led to a modest improvement in GBP momentum indicators but they remain in negative territory. The failure at 1.3000 is not going to help. It is not too hard to imagine EUR-GBP going to par in the next year. GBP back to 1.2000 and the EUR the same.  


Like Canada, the Aussie has seen a steady vol decline over the last year; with the implieds in this case under the actuals. The leveraged community is almost universally short and this raises the potential for an AUD short squeeze rally if the rally in the commodity complex were to resume. The bearish sentiment is predicated on the China slow down or hard landing scenario that has yet to materialize. China has been doing a better job than many give them credit for orchestrating a soft landing.  The risk is that the process of rebalancing combined with levels of debt lead to a disorderly unwind. Commodity prices are likely a better indicator or what is going on with the real economy than the official GNP stats. 

Best Regards,

James

Previous
Next Post »

24 comments

Click here for comments
checkmate
admin
May 30, 2017 at 1:24 PM ×

There are usually some correlations that one can use to try and steer a portfolio throughout the year. Then a couple of times a year the correlations seem to stop working so well and asset groups seem 'confused' for want of a better word. I think that's where we are once again.

Reply
avatar
dfdsfiol
admin
May 30, 2017 at 6:21 PM ×

http://www.cbc.ca/news/canada/toronto/ontario-minimum-wage-announcement-1.4137339

$15 min wage in Ontario now...

Reply
avatar
River
admin
May 30, 2017 at 7:40 PM ×

@dfdsfiol

I thought Central bankers said NO inflation since 2006. Very miniscule increase in Senior's pensions yet real estate,food, gas increased many folds.

Good times ahead for people on fixed income

Reply
avatar
johno
admin
May 30, 2017 at 8:36 PM ×

Thanks for the post, James.

EURUSD looks stretched on rate differentials here. Hedged out my long exposure on soon-to-expire option structures today at 1.12. Concerning the narrative, it feels like a disappointment is coming at the next ECB meeting where no signals on tapering may be given. I interpret Draghi's remarks yesterday as an attempt to wring out any expectations. On the political front, there are two big pieces of news, IMO, pointing in opposite directions. On the one hand, you have people supposedly in-the-know ascribing 60% odds to early elections in Italy after this weekend, which is going to make some cautious about upping bets on European assets now. On the other hand, a poll late last week showed Macron getting a parliamentary majority, which sets up for a constructive narrative around euro-zone cohesion. The emergence of 2017 Italian elections as a likelihood probably caps EURUSD for now, or at least, that's my guess.

Kicking myself for not selling ZAR Sunday. Crazy that it was trading stronger after results of the weekend NEC meeting had leaked to the press. Still, I'm reluctant to short here given the pending Constitutional Court ruling, which I expect puts the Speaker, Mbete, in a position to allow the secret no-confidence vote. After this weekend, would enough ANC parliamentarians vote no-confidence in Zuma? I'm not sure. Probably not, but low confidence on that call.

In Turkey, I want to see how a new cabinet looks after the anticipated reshuffle. Also, the effects of exporter re-discount payments resuming. One big question about the narrative of "no elections, eventual end of State of Emergency, and return to business as usual with booming credit" is the high loan-to-deposit ratios. The latest surge in credit growth apparently is mainly to do with the government's Credit Guarantee Fund, much of which is going into balance sheet repair rather than growth. Still not very confident which way this story goes.

Put on some bearish EURSEK option structures today. Also re-sold the EURNOK I covered Friday.




Reply
avatar
Leftback
admin
May 30, 2017 at 8:49 PM ×

No worries. Toronto homeowners can do a cash-out refi to buy those necessities…. Canadian housing ALWAYS goes up.

LB notes that long bonds are bid, although "rates are going higher". We also note that small caps are under-performing again today, in spite of "the recovery". There are noises off stage that suggest that European bond market and Greek debt concerns might awake from their slumber, and perhaps that is creeping into the Treasury market here.

ADP number due Thursday. After the monster miss in March (263k v 98k), faith in the forecasting ability of ADP was to some extent restored with the April data (177k v 211k). The ISM number comes out the same day. Crude oil price dynamics might move other markets tomorrow more than any economic data release, like Chicago PMI and the beige book.

Is it too early to start BLS bingo? Consensus is 185k. Let's assume this isn't real economic data and is instead propaganda, Beijing and Stalin-style, produced by a meaningless random number generator. Now if we take the mean of the last two months ADP you get 215k, and the BLS estimate comes out at 154k. Laugh if you like, and we'll discuss this on Friday.. :-)

The trickle of retail bankruptcies and CRE vacancies in Manhattan shows signs of becoming a flood, btw. Media is loathe to acknowledge these trends ("a great time to start a business", um, actually not). Insiders admit - things are "slow" in NYC CRE.

Reply
avatar
River
admin
May 31, 2017 at 12:29 AM ×

@LB

Thanks. You've taught me to read Jawboners since 2008,
especially Carney!!!! I have seen many people selling real estate thinking
interest rates will go up

Reply
avatar
May 31, 2017 at 11:20 AM ×

Hello Everybody,
if you Want Play Game on Caesino Online,
Please Click Here,

goldenslot mobile

จีคลับ

gclub

Thank you !

Reply
avatar
Leftback
admin
May 31, 2017 at 3:15 PM ×

Two support levels for IWM, one around here just below 135, another at 134.33, and a major support at 133.75 or so. If that goes, look out below, it's an air pocket down to 127.50, which would be more fun than a bag full of monkeys.

TLT at one month highs, closing in on resistance at 124.70, the 6-month high. Again, if that fails, there will be pain, notably in the bank stocks as this yield curve flattener is really starting to bite. OK, that's the TA for the day. Short IWM, long TLT.

Crude is falling, perhaps that may prove to be the story of the day for small caps, although the Chicago PMI and pending homes data also seemed to move the market. Jobs bingo begins tomorrow, closes on Friday. Eyes down.

Reply
avatar
IPA
admin
May 31, 2017 at 3:49 PM ×

smey, honey, we are the casino ;)

Last call before the gold train leaves the station.

Awfuly wrong on my last third of crude. Can't win them all.

Leftback, before we get a CMBS bailout we'll get a student loans one. 11% seriously delinquent rate and climbing. That's $154B of non-collateralized paper jamming through the system at some point (very soon I say). Can you say mini financial stress? How about the delinquent borrowers themselves - the future consumers of driverless cars and genetically modified food? That's why the core CPI is the only one that matters to our central planners, no real drivers or food will be needed soon. Kiddos coming out of college have a bright future to look towards. Top five popular jobs are awaiting them with a whopping $5/hr over some states' minimum wage. The avg student loan is 120% of the avg first year's salary of $31K for the abovementioned jobs, and needs to be paid on time or else. But wait, Trump is revolutionizing the education affordability - cutting all govt financial help for the less fortunate students while creating shovel-ready infrastructures jobs for them instead.

Pardon my cheerful attitude this morning. I blame it all on COVFEFE.

Reply
avatar
johno
admin
May 31, 2017 at 8:56 PM ×

Not the best day for my oil bets. Libyan production is the story. Have to respect the action -- cut away remainder of my delta-one bet. But holding call spread and KO call to play expected inventory draw-downs pushing the curve into backwardation. I think only 1 year out on the curve (where shale hedges production) has to stay below the low-50s, which means there isn't much upside to near-dated oil except through inventory draws tightening up the physical market. Cut back EURNOK earlier today to add at better levels or when underlying drivers start showing momentum (in the right direction!). Holding short in USDMYR though it's looking like it may pause/pull back here. Still a few days left on my USDTRY options, but probably don't want to be left with a delta-one short position after expiry.

Trump is a total joke. The China growth impulse is fading. Inflation numbers (European core for May, which isn't distorted by Easter effects, was same as rate at beginning of year) are uninspiring. All lining up for LB's thesis.

Meanwhile G-4 central bank balance sheet growth doesn't flatten out until next year sometime, so hard to expect some market volatility really picking up until then. But we'll see ...



Reply
avatar
checkmate
admin
June 1, 2017 at 11:46 AM ×

"The data, from Nationwide Building Society, saw prices across the country dropping by 0.2 percent month-on-month in May. This followed falls of 0.2pc and 0.3pc in April and March respectively"
What do we call a trend again? Yet Neil W thinks buying cyclical is now the way to go.
If I were a cynic I might think he had got to a point in his career where he was more focussed on the 'brokers yachts' than his clients. We will see. I might yet be wrong ,but right now I still think people buying finance, property at this part of the monetary cycle are going to be disappointed. As it stands we might be in that period where this kind of softness in data is ascribed wrongly to politics and won't be seen transparently as fundamental economics until the data fails to bounce back in later qtrs.
There's certainly plenty of latitude for non UK money to play in this market where they don't really understand the underlying that well simply seeing it still as some sort of value play.

Reply
avatar
Leftback
admin
June 1, 2017 at 7:37 PM ×

Regular readers will be familiar with our fascination with Weapons of Pension Fund self-destruction (a variety of "vol selling" strategies, all of which are quite "safe" in the hands of "sophisticated investors"). We were reminded of this recently by an article on another "pennies and steamrollers" arb strategy that went south, at Long Term Capital Management.

https://www.bloomberg.com/view/articles/2017-05-02/low-volatility-and-the-risks-of-crowded-trades

You might also be amused to check out some recent summaries of Johnny Retail's Adventures In Vol Selling. This now takes a bewildering variety of forms from buy/write and put/write strategies to "inverse volatility" ETFs.

https://www.thefelderreport.com/2017/05/02/when-your-uber-driver-tells-you-to-sell-naked-put-options/

There are ETFs for buy/write strategies (e.g. PBP) out there, being used for "income", and there are ETF vehicles now for trading volatility from the short side. XIV and SVXY… and they are being punted by tiny punters. Lots of them.

What could go wrong? We recently constructed a little punt to take the other side of the trade from these geniuses… there is an astonishing amount of reflexivity built into vol of vol that knows no reason once unleashed. Perhaps the best part of having some upside exposure to an unanticipated increase in vol is that the nature of the trigger (higher rates, lower rates, Trump, North Korea, Fedspeak, strong jobs data, weak jobs data) simply does not matter….. anyway, with vol plunging again and a jobs number ahead, why not?

Reply
avatar
CV
admin
June 1, 2017 at 8:32 PM ×

"We recently constructed a little punt to take the other side of the trade from these geniuses… there is an astonishing amount of reflexivity built into vol of vol that knows no reason once unleashed"

Amen LB. These dudes are mad ... when "All the Devils Are Here 2.0" is written it will have a big chapter on the vol selling heroes. I seriously can't believe that endowment and pension funds are in on this ... nevermind retail punters.

Great call on the long bond too. It really is crunch time here. I you have 3-4 hikes at the Fed in the next 12 months, it stands to reason that your 2-year yield forecast *has* to be well north of 2%. You better hope that 5s and 10s shift higher in parallel fashion ;) ... because if not ... well hello inversion!

Of course, the Fed could stand pat ... it is not as if we haven't seen that before.

Reply
avatar
June 1, 2017 at 8:36 PM ×

Being systematically short vol and long long bonds has been an excellent trade, perhaps the best version of risk parity out there, but every trade has its due (except that no one might be left to take the other side...)

Reply
avatar
johno
admin
June 1, 2017 at 8:37 PM ×

Nice, LB. I'll have to look into this.

Meanwhile, Stefan Ingves, who shares some resemblance to the Swedish Chef of the Muppets, has this to say:

“Somebody has to take away the punchbowl,” Ingves is quoted saying. Says Sweden’s housing market “is completely out of equilibrium” and households are borrowing “way too much”

And yet, he's got the policy rate stuck at -0.5% and keeps extending QE. Muppet.

How about crude? Big draws reported by EIA and API, and in each case, the pop gets sold. Curious.






Reply
avatar
IPA
admin
June 1, 2017 at 11:52 PM ×

johno, need not forget that WTI is in a $45-52 trading range. Players have been selling 89ema on 1hr since $52 hot potato selloff began. I was a bit hopeful on Memorial Day when two closes above it were achieved, but totally forgot that Globex gang is just a little tail of the dog which resides on Nymex.

Did you see the Russian economy minister say that Russia can live with crude at $40 and below forever? Really? What will be his next statement? We don't depend on oil at all? Anyway, he is worried about the price 1-2 yrs out. Players are paying attention here as he said "the other side of shale producers' hedges is in trouble". He sounded a bit irritated as he said it too :)

https://www.bloomberg.com/news/videos/2017-06-01/russia-s-oreshkin-ready-to-live-forever-at-40-oil-video

Reply
avatar
johno
admin
June 2, 2017 at 12:14 AM ×

They can certainly live with oil at $40 or below forever. Ruble carry traders won't like how they achieve that, though ;)

Reply
avatar
June 2, 2017 at 7:51 AM ×

Any Colour on the strategy LB?

Reply
avatar
Rain
admin
June 2, 2017 at 10:55 AM ×

Good point checkmate: "As it stands we might be in that period where this kind of softness in data is ascribed wrongly to politics". The uncertainty/circus around politics make it easy to pin market non/moves on that.

I actually think that will continue until the wallpaper can no longer stick to the mouldy walls of the real economy. Not expecting the numbers today to start that but it's coming shortly.

On Oil, move for this contract is nearly at a decent range, in the short term i see ~$45 levels before heading on down to $40, not on oil related reasons but 'global economy slowdown' talk.

Reply
avatar
Skr
admin
June 2, 2017 at 11:12 AM ×

Well that oil trade I mentioned last Monday week, worked out a treat.
Still think DXY is a buying opportunity at these levels. As stated before 95.5 is my worse case scenario.
As I am one of the few extremely bullish contributors on American equities, it may come as a surprise that I am now building a short position. Objective was reached yesterday. I would be very surprised if there is 1-2% left in this.

Nico, now is your time to shine :)

Reply
avatar
checkmate
admin
June 2, 2017 at 11:19 AM ×

Rain
Todays construction numbers cite good growth, above expected, in new builds now at it's highest since Dec 2015. Compare and contrast to transactional volumes steadily falling for approx. 12 months and now three consecutive drops in values stating from Feb '17. Leave you to think that one through. For those who think construction companies are good at forecasting demand you are indeed blessed with short memories. I will forever recall the retired ex CEO legend who bought big the equity of his previous construction company at the latter end of 2007. dare say he could well afford what cam next ,but it's a fitting example of how blinkered corporate forecasting can be.

Reply
avatar
IPA
admin
June 2, 2017 at 12:36 PM ×

@Skr, care to elaborate on your oil, DXY and American equities price objective models? Please put some meat on the bone for us.

Reply
avatar
Skr
admin
June 2, 2017 at 9:09 PM ×

@IPA, I remember asking something similar to your question when I was still learning - so I won't take offence.
Let's just accept we are all helping each other, shall we?

Reply
avatar
IPA
admin
June 2, 2017 at 10:14 PM ×

Skr, you took my comment completely out of context. I was actually asking you for the exact strategy pointers and not mocking you at all. Sorry if it came out that way. Reread it with that in mind and let's chill.

Reply
avatar