EMFX And USD, The World's Newest Petro Currency

Well, even the St. Louis Fed has caught wind of this reversal in USD:




Indeed, it has been a nice run. Speaking of which, has anyone seen Abee? The guy splendidly calls the bottom in the USD trade and then does his best impression of J.D. Salinger. Come on man, take a victory lap...


What I find interesting about this move is not so much the fact USD has bounced back--as noted the long USD trade had a lot going for it, including way too sanguine Fed rate hike expectations relative to the state of the economy and underlying inflation drivers. More compelling is how during this reversal since the September FOMC meeting, high beta EMFX has gotten decimated. Take a look at the chart below, which is normalized spot currency performance vs. USD back to the end of June:


At the top you have low beta names, those leveraged to China and the global growth cycle: KRW, INR and CNH. At the bottom you have three high-beta EM currencies: ARS, TRY and ZAR, all with their own political and/or economic problems and low real interest rates.  


What else do you notice about those bottom feeders? They’re all oil importers. Take a look at three more high beta EM currencies, but this time oil exporters: COP, RUB and BRL:
 



This basket has given back some gains, but are still skulking 1-2% from mid-Sept levels. Now let's dig out ye olde Brent chart...Another one that a peanut gallery regular (IPA, take a bow) nailed square in the chops a month or two ago:




This leads me to a couple of conclusions for what is driving this move, and what may be next:


  1. Don’t forget this chart: Demand has been the major driver of this move higher in crude.  The supply side has been a snoozer.
  1. As such, an economy that is growing aggregate demand, increasing interest rates, and exporting energy (if not crude, than the sum of coal, crude, LNG, and products) should do well, and so should its currency. Don’t discount the increasing correlation of USD to crude--a correlation I remember being close to -1 in the not so distant past.   
  2. Indeed, this is a relatively new phenomenon as US production has steadily increased. When I sat next to a nest of energy traders in the early part of this decade, they batted around the term “tight oil” a lot. I had to ask under my breath one day, “um, what is tight oil?”  Shale. It means shale. Note the steady rise throughout this year.
  1. So we have a situation where global growth is good ( +China), demand for consumer goods is strong ( +Asian exporters), which has led to higher commodity prices. Interest rates, if not quite buried in a the sandpit of a couple of months or a year ago, are still not getting out of hand. In sum, that's a pretty attractive scenario for EMFX. Where does that leave the high beta energy importers?


Well, I think in pretty good shape, because of that last chart. Oil prices are still well off their highs and new tight oil production is the marginal barrel in the energy market. For the carry-trade energy importers, terms of trade haven’t taken that bad of a hit, especially when offset against gains in other commodities (copper, etc.) or export demand at large.


The total whitewash in some of these currencies looks more like positioning getting too heavy in carry trades during the 2017 weak USD trend. I think that is a bit overdone here- a view I have some confidence in for a couple of reasons:
  1. Risk markets elsewhere are taking out new highs
  2. No material change in interest rates (yet) that would change the economics of carry trades
  3. BTD mentality doesn’t stop at FANG stocks…


ZAR certainly is a strange animal and has been hammered for reasons well beyond terms of trade. But the combination of political noise and higher oil prices has supercharged this move--not unlike what we have seen in MXN over the past few weeks as the NAFTA spitting contest heated up.

Where will politics take these currencies? Plenty of opinions out there on that--I have my views which are beyond the scope here; the point is USD is more highly correlated to global growth than any time in the past, and “risk-on” currencies are poised for a come back if the underlying dynamics remain intact.

Shawn
TeamMacroMan2@gmail.com
@EMInflationista
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Raghav
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October 30, 2017 at 11:57 AM ×

Coudn't agree more ra a rally in Zar, the political mess underpinning the weakness. 14.24-25 was a great entry level for long zar position IMO.

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October 30, 2017 at 2:44 PM ×

Fuck me. I don't know where the plague is more acute, Washington , or Australia.
No one will listen. Those dreams are wonderful. Many thanks.

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October 30, 2017 at 2:48 PM ×

His last $10million dollar bet.LOL

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Leftback
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October 30, 2017 at 4:11 PM ×

Sorry to be off topic here, but it's my role here to be obsessed with bond markets, specifically govies and spreads.

Italian 10y now yield 1.85% (yes, ITALY), gilts 1.34%, bunds 0.37% ...... US 10y 2.38%. That's a 53bps premium for buying US 10y over BTPs, 100 bps over gilts and and 200bps over bunds. So this explains why USTs remain, quite rightly, very attractive to foreign buyers. So who is buying and what are they selling? Not Italy, Spain or even Catalunya.. but....

Chinese 10y are selling off and the yield curve has inverted a few times lately. In normal economies this would indicate an upcoming or imminent recession. It's not clear where that is going, but I suspect it will end at some point with another yuan devaluation in order to stimulate the Chinese economy. Bond vol has already started to give rise to equity vol in Shanghai, as we and others had warned might occur at the conclusion of the recent Communist Party shindig.

We added to our long TLT position again last Thursday and bought some munis as well. Fed decision Wednesday, hard to see a major move in the Dots, December is baked in, and remember that it is the Terminal Rate projection not December's FFR that moves the long end of the curve - then Thursday we get the new Chair announcement, which fairly clearly now will be Powell. If I was one of those punters holding a piece of that historically large short position in 5y, I would be quite nervous.

US equities are going to cruise through this week, I think, based on removal of the Taylor Risk, after that things may get interesting as bits and pieces start to fall off the Tax Reform wagon. Keep half an eye on China. They love to do those chunky exchange rate increments over the weekend.

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johno
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October 30, 2017 at 4:18 PM ×

Yes, EMFX weakness does seem a dip-buying opportunity given the growth backdrop, though carry is pretty meager (excl. TRY, ARS). Possibly the Powell appointment will be a catalyst. China would have me most worried. No mention of a growth target by Xi, though we'll only know for sure how significant that was in March of next year (when the annual target is usually announced).

Morning in Europe. Rajoy has done the right thing, invoking article 155 and setting elections for Dec 21. Polls say the pro-independence will lose. Looks like Puigdemont over-egged the cake. And hey, look, Italy got UPGRADED.

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IPA
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October 30, 2017 at 5:32 PM ×

@Shawn, the dog ate my acceptance speech.

I don't mean to be an ass and sound a contrary view after you gave me a pat on the back but I am on the other side of the dollar trade. After all, the last thing you need is a bunch of "yes" men around you. You probably remember my view on DXY (one I relayed to @johno a month or two ago) in regards to a 2009 weekly chart resemblance, once weekly 8 ema is breached it goes higher. It sure did just that. I also told @abee that 94 was not the best place to buy and I would look at buying the right shoulder of inverted h+s at 92.50 (it turned around at 92.75). Well, one is allowed to change his mind, and do it often. I zoomed the heck out and saw 2002, that completely changed my mind. Yes, I am missing my own short-term trade for a bigger one at hand. I am not denying my 94 resistance snafu but I expect monthly 8 ema at 95.20-30 to be a formidable resistance and my target on the downside is 84. Here is my DXY 84 target approach, a very simple one indeed: 100-92 box extension, 102-91 bear flag pole distance counting from Fri high of 95, and 2012-13 double top support after 89 is broken to the downside. My entry is going to be this Wed-Thu on Fed meeting/new chair announcement/retest of Fri high attempt by longs. I expect a slight breach and a sell-off after that once the stops above 95.15 are scooped up.

I fully expect to be rebuked.

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Shawn
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October 30, 2017 at 6:10 PM ×

DXY 84? Can I advise a better strategy: 1) Bag the DM ccys, 2) wave in ZAR, TRY and a currency from the banana republic of your choosing, 3) Wait a year, 4) buy a yacht, 5) name it "Carry Trade".

Sorry...seriously, if you have a couple of fundamental drivers to back up the technical stuff, I'd love to hear it.

The point I was trying to make is that a strong dollar and a bounced from here in beaten down, high-beta EMFX need not be mutually exclusive as they have been in the past. I can see a scenario where 1) oil prices remain at these levels or higher, 2) USD strengthens vs. G7, 2a) US corporate profits continue to do well, 3) Rates don't go anywhere fast (grind higher), 4) gold takes another beating, and 5) EM/risk-on flows give a bounce to recently beaten down high-beta EMFX. If USD simply rolls over and plays dead, the point is moot.

In the past, it was almost always the case that higher oil prices driven by global demand, not geopolitical risk or supply was a dollar-weaker story because of terms of trade. That's no longer the case.

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IPA
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October 30, 2017 at 7:06 PM ×

@Shawn. lol, thanks, I'll pass.

The main culprit of DXY going to 84 will be a major push of EUR/USD to 1.27 which is a 1.05 - 1.16 box extension and Nov 2012 - Jul 2013 bottoms, the next chart resistance after 1.20 is taken out on monthly closing basis.

Like I said, I fully expect to be ridiculed :)

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abee crombie
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October 30, 2017 at 7:36 PM ×

hey shawn nice post. yeah I got lucky with the DXY. make enough calls and one of them has to be right. my whole theory on the dollar is 1) its mostly a relative call on US vs Global growth trade 2) interrupted by trend or event changes in interest rates. Given how strong global growth was since this time last year its surprising DXY isnt weaker (but then everyone was negative on EUR still I guess). I just see a big slowdown in China still. Yes I have been wrong on that call but think its just a matter of timing. Weaker China --> stronger dollar. thats it and FX will get the msg b4 equities or credit. Lets see. So far copper is stuck up here (not sure why, would love to hear other thoughts). EM FX, aside from the messed up countries like ZAR TRY is interesting. I am a buyer, but at lower prices.

IPA, my call on software was off. they didnt cater b4 earnings and no one can short the mega caps into earnings so no real surprise there. But cracks are starting to appear in the semis. MS downgrading AMD, after reporting. SK Hynix is down on CLSA downgrade on the top of the Dram cycle. Watch AVGO and TSMC, when those boats start turning too its time to play from the short side. Way too much optimism in semi's.

But its november soon. Who want to short this market then. So we probably have to wait for Jan/Feb before we see fireworks. Until then, bitcoin 10k looks like a nice target for optimism and all the num nuts shouting the bears dont understand a thing.

happy trading and glad to see the blog still running strong.

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Leftback
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October 30, 2017 at 8:28 PM ×

I am on the same page as Abee here. If we do see a weaker China (I think we agree - see strange yield curve) then logically in FX we should be seeing an opportunity to short CADUSD and AUDUSD. Not good for Aussie or Canadian banks - as discussed here often in relation to the mysterious marginal buyer of those magical real estate markets.

Mr. Bond and Dr. Copper clearly disagree as economic prognosticators today. Copper is still predicting a global reflationary impulse, the ever-flatter US (and inverted Chinese) yield curve is predicting a slowdown. Let's see, one is an incredibly large and liquid market and the other is a tiny little commodity market that sometimes features tourists and surprising leverage.... hmm... ?

Today was a painful day for the bond bears.

On the dollar, if China wants to devalue at some point, then they have to buy USD and they typically do that by buying large quantities of Treasuries. I would therefore suggest that you probably don't want to be short either of them at the moment. Luckily, there are large numbers of newly decerebrate punters who are eager to play the Rising Rates game, and we can all enjoy their discomfort over the ensuing weeks.

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johno
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October 30, 2017 at 9:27 PM ×

Re TRY, I understand the big takeaway from the CBRT last week was that they would look through an expected decline in Q1 inflation and likely stay on hold much longer. The trade is maybe in buying long bonds and hedging out the FX, but I've given a small short USDTRY a go. I could write out twenty reasons why the lira is a piece of sh1t, but the point is, it's arguably cheap sh1t here. Anyway, I hate it enough to not get caught wrong-way for long.

Re ZAR,the budget was awful in that there was no policy response to fiscal slippage and no commitment to stabilizing debt/GDP. Maybe it was that Gigaba couldn't make any commitments until after leadership/cabinet is sorted after the December ANC conference. Anyone follow this closely and have a view that the fiscal anchor hasn't come unstuck? Any reason to believe Moody's and S&P aren't going to cut local debt to junk imminently?

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October 31, 2017 at 1:01 AM ×

Lots of dollar bulls out there. I like it. @IPA You might want to rethink that short dollar trade. If you'd like I can elaborate my concerns for dollar shorts, but it's really complicated and requires a lot of typing so I'm good for now.

@Shawn, I agree with you on just about all of your points above. What's your commodity ideas (if any) Just curious (did we already discuss this?) If so my fault....fucking long Monday bro.

@LB I'm with you on the short side of CAD and AUD

@Abe I have no proof, but they have set up a commodity financing cartel. They buy the market cheap, they securitize it, then, they look to HKMA for some cheap cash, financed with the collateral, and transacted in the repo-market. Again, no proof, but its entirely plausible. Also, the new BDC's, off-shore entities, and finally Trust holding companies could all be straight hoarding copper and actively manipulating the price. It's the fucking wild west in the Pacific this year.

@Johnno that ZAR downgrade from both S&P and Moody's could be coming any day now.

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October 31, 2017 at 1:11 AM ×

If you guys would like I can show you a semi-classified transcript involving Goldman, JPM, and Morgan Stanley. The Senate joint committee on finance was going through the motions of course, but what these banks had accumulated via holdings companies was nothing short of INCREDIBLE. So if they decide to go big...they go big

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abee crombie
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October 31, 2017 at 2:16 AM ×

@ shane. I dont have any strong opnions on the commodity re hypothication trade in china/hk. But i think the chinese crack down on shadow banking is for real and been ongoing now for a while so i assume most of that money is out but who knows. But since we are talking conspiracy, makes more sense if its just glencore f$#$ing around. Or who knows maybe some ppl see chinese air conditioner growth going up another 50%yoy next year. I dont mind one bit as i think it sets the market up for a bigger reset even if the current price is right. Chinese commodity usage/demand/ volume whatever u wanna call it is gonna come down. Xi just told u. And i think global markets are totally missing the winter production cuts. Lets see come jan.

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October 31, 2017 at 2:28 AM ×

@Abe I am with you on the reset all the way. We have to have a bottom. Where all prices in the market can clear and reset (or most of them) Funny you say that about Glencore because they were all in 3 years ago when this commodity securitization caught on. Now, normally I'd say, "dude your right demand has to fall sometime." but they consistently pull a fast one on people and I'm forced to think longer term about their future. Don't get it twisted China has to crash and badly, but trying to strategically position around those "money Mandarins" (hat tip to James Grant) has proven very difficult.

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October 31, 2017 at 10:18 AM ×

Hey, Macro Man. Did you just hear Frenchie say.....

https://www.youtube.com/watch?v=upD6cB9Rzvk

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October 31, 2017 at 11:50 AM ×

Hey, Frenchie. Little fella out there on his boat is a sack full of shit. You need a miracle.

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October 31, 2017 at 11:55 AM ×

@johnno here is the mighty Catalonia President Carlos Puigdemont speaks in Brussels after fleeing without warning. Man it fell out quick over there. Ol boy is already dipping out

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johno
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October 31, 2017 at 3:18 PM ×

Not bad payoffs in USDTRY options. 3M 3.70 digital put, for instance, is ~20% offered. At 3.70 would be about 1 SD cheap on my model. Maybe better way to play than outright shorts.

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October 31, 2017 at 3:22 PM ×

damn, I hadn't seen that pair in a few days. I think USDTRY payout is better than not bad man....shit

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johno
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October 31, 2017 at 4:00 PM ×

Yep. Some interesting-looking payouts there. For those screening by carry/ATMF-ATMS-spread, ratios are >2.5. CHFTRY a standout for me (I'm a CHF bear). I've done a few trades in USDTRY and CHFTRY options today.

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abee crombie
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October 31, 2017 at 6:40 PM ×

@shane, re copper and a china crash. I am not predicting a china crash as the ppl running the show clearly know what they are doing. Nor am I really bearish on copper LT. But I do have a good idea that Chinese supply side reform is all the rage today. Its pushing up some commodity prices, like steel, ali, cement and coal, bc supply is being rationed. Copper isnt in the same boat. China isnt the marginal copper producer, although it probably is the price setter. So yes you can take current price signals in steel or chemicals (check out BASF & Covestro) and even DRAM and assume global demand is raging. Or you can take the other side and see that Chinese construction/IP/CapEx is poised to slow from the large credit creation of the last 2 years. This will all seem fairly obvious next year, IMO. But right now Europe is killing it, US corporates are killing it (even as the consumer is kinda limp) and Asia/EM are enjoying a nice bounce back from a horrible 2015 and lackluster 2016. I could be wrong, US could do a major tax reform, Brazil could grow at 4% next year and commodity prices could continue to rise (and this all happens with benign rates) but I just dont see it. Fwiw, I think its too early to position for any of this really except in some EM FX/ commodities. The fun starts when spreads start to widen

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November 1, 2017 at 6:59 AM ×

Yeah, my fault @abee. I didn't mean to make it sound like you just called your shot. I know better bro. Honestly, I'd write more if I needed to, but I agree with everything you mentioned above. Eventually, I will explain my views on the future of the Pacific. So, I agree, positioning and all. ONE last thing@abee, the US is on the verge of big tax reform and Brazil soybeans to China via the FUCKING PORT they leased for 99 years to mess with the US a bit? That should really help Brazil. I think BRL is a strong currency next year. Yeah, it will be epic once the spreads start being pushed to the max...good looking out.

P.S. Anyone been paying attention to coal country? Fuck that's good to see them rebounding. Most of the world is really really poor, but in trying to develop best they can they need a reliable source of cheap energy. Look at the bases this covers. Helps the broader economy, improves our terms of trade (exporting coal), wins at the state level...and I mean a real win dude. Finally, we're helping several less fortunate countries develop their infrastructure (among other things) via cheap energy. HUGE WIN, but...how is this not talked about more in public???? FUCKING MSM crooks don't want to cover some actual decent things happenning in America....

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November 1, 2017 at 7:38 AM ×

Who cares about the news, casino and hotel stocks. There was only one bull run you wanted to be in when it was around. Miss it. But, I have the reins motherfucker!

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Leftback
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November 1, 2017 at 4:26 PM ×

75 and 84, now the flattest since 2007. What am I talking about?

Don't want anyone to think I am obsessed with the curve, but that's 2s10s and 5s30s, people. This is one of the more important macroeconomic signals. The US economy is apparently slowing, despite GDP forecasts. The Japanese experience suggests that severe flattening can occur in a post-QE environment and presage either a mild recession, equity market weakness, or both.

Not convinced yet exactly how this will play out, but I would avoid:

1) Reflation vehicles, including commodities.
2) Banks.
3) Shorting the long bond.
4) High yield credit.
5) Small cap equities.
6) Leveraged unicorns and crypto-currencies.
7) FX carry trades.
8) Short vol strategies.

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johno
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November 1, 2017 at 10:34 PM ×

Here's a question (Shawn?): what odds would you give AMLO losing and NAFTA being successfully renegotiated (by summer of '18)?

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johno
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November 1, 2017 at 10:50 PM ×

The dovish hike tomorrow by BoE? Can't be that dovish without looking nonsensical. Still, bought some long-dated puts on cable with KOs a fair bit higher than here (call it fear of missing out on selling GBP at decent levels ahead of Brexit talks breaking down). Also bought some EURNOK digital puts expiring in a few months on Tuesday. That was a decent trade last time that cross got out-of-whack earlier this year.

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johno
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November 1, 2017 at 11:08 PM ×

Gambling on a short-term bottom here in NZDUSD too. The whole change-of-mandate thing seems over-blown, and I wouldn't be surprised to see the RBNZ downplaying it next week. Labour will get to appoint the next RBNZ head, but at the same time wants monetary policy decided by committee, so dilutes the impact of any left-field governor appointment. The minimum wage increases and reduced immigration are all inflationary, which I'd think gets you to hikes sooner than later. And while the foreign home buyer restrictions are eventually a negative, they don't go into effect until early next year, and so might foreign/Chinese buyers rush to buy before then? Last chance to own a home in the land of the hobbits? Too good to pass up!
Meanwhile, a Dec hike in the US is very well priced, the Taylor risk is off-the-table, CESIUSD Index (US economic surprises) is in the "good news peaking range," and Treasury cash balances are going to start declining from here, i.e. USD liquidity to improve, so I don't mind the USD short leg (still, don't want to go big time short USD everywhere as EUR might have more downside from here).

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Buy Stocks
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November 1, 2017 at 11:28 PM ×

Stocks push up to new highs again. Me Celery-iac has just had his face ripped off, and joins the loser brigade of Nico et al. Christ I'm gonna laugh at all the macro fckwits here when SPX hits 5000 in a couple of years.

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checkmate
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November 2, 2017 at 8:08 AM ×

LB
As usual it comes down to this. Do you trust the government bond market when it comes to economic forecasting. Despite some vigorous flip flopping that might have hurt shorter term participants the longer term signals have really not given but one message. They say this monetary cycle ends Japanese. That is they do not see duration risk (inflation) and in flattening (inverting) they do see economic conditions worsening that translates into risk defaults (safety). As we know though the bond market is not a precision tool and risk markets that love momentum rather than fundamentals can go on much longer than it's comfortable to bear ,excuse the pun.
Buystocks, your problem is you think that risk management through macro is in competition with risk exploitation via momentum. The players are different ,they have different goals and that mistaken thinking of yours leaves you confused.

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November 2, 2017 at 8:34 AM ×

@checkmate.

These Japanese bond widows think they're getting hold of a broken down horse , and they think they can take it home and swim it and work it alongside whatever horse suits them. Moments like these ,thank God I'm somewhere upon the Austistic Spectrum.

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November 2, 2017 at 8:51 AM ×

@checkmate.

You watch Dr.No out there on his boat with this team punters do their best undermined a beautiful plunge in the making because they haven't got a clue how to do it themselves. Dr. No will be on phone ringing around Hollywood and the traps throwing his sack of shit around demanding someone give him a channel into the group of punters. Chow.

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November 2, 2017 at 9:19 AM ×

PS....You've insulted my intelligence beyond belief. You get that.

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checkmate
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November 2, 2017 at 9:23 AM ×

No,but in truth the last time I could actually be on your wave length was in 1969 when I had some wonderful experiences that we won't delve into.

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November 2, 2017 at 12:13 PM ×

@checkmate

Don't worry about Dr.No. He always escapes the Japanese bond market short stop run by sending out a trading tip sheet to his Hollywood and what ever pals declaring that the bull run in the Japanese bond market is down to the liberalization of Middle East Oil. I can hear it from here. Dr. No "it all".

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November 2, 2017 at 12:21 PM ×

@checkmate.

To sum up the Japanese bond market. The Buddha couldn't not have put a finer team of punters on Dr.No's "CrabKEY" boat to plan of entry mode into the Japanese bond market.


YOUR THE BEST

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checkmate
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November 2, 2017 at 1:02 PM ×

BOE, we'll talk slowly using a deep voice ,use words that sound useful ,but are unintelligible , back it up with a 100 page report that will put you to sleep by page 5, this way you know we are worth our large salary cheques. Frankly, they could just have turned up said 'got to do the minimum 25bps because we'd be embarrassed if we didn't , but the good news is we won't be doing it again any time soon'. 'This is your invitation to kick sterling in the goolies and buy up anything that will get you a real return'. On a plus note they probably just ensured my next quarter is going to be better than my last.

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Shawn
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November 2, 2017 at 6:07 PM ×

@Johno, previously I had thought Trump didn't have the incentives to ax NAFTA outright. Now I'm not so sure. I think the odds of a successful and business-friendly renegotiation of NAFTA is relatively poor, like 30-40%. At the last round the US negotiating team went out of their way to put non-starters on the table (sunset clause, US content rules, etc.). I think they've been given orders to crush the bilateral trade deficit and there isn't much good for Mexico that can come from that. And as time goes on Trump needs a victory, or at least to look strong and decisive in doing something. And kicking Mexico plays well with both his base and union democrats in the midwest that won him the election.

Regarding AMLO, anything can happen between now and July 2018, but my base case is still that he will win (call it 50-60% if you want a number). Personally, I don't see how he gets less than 30-35% of the vote he got in the last two elections given the local, regional and global anti-establishment sentiment. Some say the split in the left between AMLO and the PRD will eat into his vote, and there is an independent candidate I think could come out of nowhere to win some votes (Ferriz). But the establishment parties are such a disaster I don't think they can convince people they can hose the sleaze off the corrupt system.

So just for fun, the joint probability (although they aren't independent events) is 35% (NAFTA 2.0) x 45% (AMLO loses, and not to a crackpot) equals, I dunno, lets say 15%?

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johno
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November 2, 2017 at 6:39 PM ×

Thanks Shawn, much appreciated. Those sound like reasonable odds. I was looking at 9M 17.00 digital puts, for example, offered at just under 10%. Looking at that joint probability (not to mention the possibility of recession/EM deterioration), it doesn't seem like there's as much vig as I thought on first look.

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johno
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November 3, 2017 at 2:22 PM ×

Stopped out of my small -USDTRY on the ugly inflation data. Ah well. Took profits in both CAD and NZD. USD impressive today, snapping right back from the AHE #. And we haven't seen any "coast is clear / Taylor tail risk is cut" buying in EM. Interesting ...

I also wonder whether Brazil is ripe for a change of view. Pension reform before the election now looking quite unlikely and Lula and another populist are the leading choices. Still, hard to see things getting out-of-hand in the currency, given how much the current account has improved and the steady FDI (very different from Turkey).

Have a nice weekend, all. And Shawn, thanks again for your reply on Mexico.

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November 3, 2017 at 3:17 PM ×

Good call with Turkey. The only worse performing currency this year is Qatar's. I know last night they upped the inflation assumption to 10%???? It's getting hot over there. Not sure where we stand with Brazil...hoping they stabilize, but not counting on it. You guys paid attention to the CEE area yet? Eastern Europe is fascinating right now

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Leftback
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November 3, 2017 at 8:36 PM ×

Thanks for the comments, checkmate.

The yield curve continues to flatten unrelentingly, in a remarkable stealth trade that few have highlighted. 2s10s 72bp, 5s30s 82bp at the end of this week. The technical and sentiment indicators for the long bond have flipped slightly positive at the same time as the long end has outperformed. There is another 5% upside in TLT at least before that trade becomes a bit extended. The initial (dec 2016-july 2017) swing trade in TLT was our main money-maker this year, another one would be welcome.

VIX briefly dipped below 9 today. Remarkable stuff, especially in light of the FOMC officially kicking off the downsizing of its balance sheet in Oct. Small caps lagged today, usually that adds to mild bearishness [on occasions when we express that idea].

We are betting on a surge in vol during Dec and Jan, but it might start sooner so we have divided our bets through Q4 into Q1. High yield is already looking weak, and the long-awaited "blockbuster" jobs number failed to materialize, even as the traditional Q1 showdown beckons. A decent Q4 is priced into the markets here, as is another 25bp rate hike.

Once again we are pondering that most loathsome of trades... long yen [and long vol]. JPY bottomed out around this level mid-July, and a rise in JPY led the increase in volatility in August. The usual pattern is volatility in FX, then credit, finally equities.

We like JPY, the long bond and volatility. That more or less guarantees torrents of abuse and rotten fruit, doesn't it?

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zj
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November 4, 2017 at 2:29 AM ×

@LB,

I agree with you on long bond and VOL. But USDJPY looks like to break out to the upside. This is purely from the technical point of view.

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November 4, 2017 at 5:15 AM ×

LB, let's get it done in the markets. Sydney is a no go zone for gambling stocks, period. Turkey and South Venezuela are a no go zone for gambling stocks, period. Let's move into the structure of Western capital markets and their reliance of Asian liquidity. I told ya, being me does have some benefits.

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November 4, 2017 at 9:53 AM ×

Hey, LB. I forgot.

Yeeeeeeeaaaaahhhhhhhhhhhhh!

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November 4, 2017 at 10:02 AM ×

Long Vol @LB hell yes. Dude, that will be a fun trip. I agree on VOL, long end of the curve, long dollars, long commodities, etc. I see your reasoning with the JPY. However pitted against the dollar I have different views bro. Otherwise I agree w/ya. @amp U can’t ever tell what your talking about...maybe I’m out of the loop? Getting to my point, I think I know what u mean regarding Asian money in western markets, but any way u could elaborate what you were thinking?

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November 4, 2017 at 10:05 AM ×

Shit my bad, I can never tell what your talking about is what I meant...

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November 4, 2017 at 10:40 AM ×

"@amp U can’t ever tell what your talking about."

@Shane, I'm going back to finding winners alone. That's what got me here.

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Leftback
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November 5, 2017 at 1:17 PM ×

On USDJPY, nothing goes in one direction forever. There are some indications that the US may stumble a little in the next few weeks and months, tax bill may not pass, jobs growth isn't gangbusters, and the one hike that is coming in Dec has long ago been priced in. Some indications of technical support for JPY - we might see a reversal in that trade for a month or two.

The new leadership in Riyadh apparently believes in getting their retaliation in first. Nothing like a coup against likely architects of a coup before you actually come to power.

Bad day for Prince All-Wally of the House of Saud. It is so delightfully medieval over there. Lock them up in the Tower, star chamber type courts, beheadings and so on. Nice place to drill, but you wouldn't want to visit… ;-)

Hope All-Wally wasn't selling vol and buying spooz. Wonder what else he has been up to? Money laundering covers a lot of bases. His holdings are going to get whacked on Monday morning. Hello C, TWTR, AAPL….

The new Crown Prince seems nice. I mean, we wouldn't want to mess with him.

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IPA
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November 5, 2017 at 2:50 PM ×

MbS takes a leaf out of Putin's book.

Maybe All-Wally was locked up for secretly mining Bitcoin while criticizing it? Lol... Dimon better watch out. We may have a "corruption purge" of our own here. Ok, I better keep my mouth shut.

Political power struggle in times of tighter supply. Is this what's been driving the oil price higher? Speaking of Putin, election coming up in March. That production cut extension is looking like a done deal.

I don't know what CNBC will do for ratings w/out All-Wally. I guess they gotta go heavy on Buffett now. The man is getting ole...

In any case, @LB, should we add #9 to your list above? Avoid USD.

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November 5, 2017 at 11:27 PM ×

@IPA, "Ok, I better keep my mouth shut."

I will do nothing of the sort. The flow of liquidity coming down the pipe from above is so obvious it is sickening. These people think they can buy off your soul. I'd rather do time than make them money.

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November 5, 2017 at 11:36 PM ×

@IPA,

I'm going to make sure every dollar of that liquidity pours down the drain of " I'm not coming back" with anything on top.

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November 6, 2017 at 12:26 AM ×

@LB Check out the BOJ minutes. “Members of this committee would not hesitate to intervene if the appreciation of the Yen persists thus hurting the economy.” JPY outlook doesn’t seem hopeful, but I could be mistaken. My point in my dollar thesis is it’s a basic supply and demand issue. Everyone wants dollars, problem is there isn’t enough dollars in the world to meet demand (a credit/debt based economy) while the US fed sells the balance sheet they will suck in dollars from around the globe. The rest of the world is still rocking QE for at least another year. That is flow of capital will bbe headed to the US regardless of Trump’s struggle to pass bills. A little patience and luck...domestic policy bears fruit adding to the US terms of trade. I’ve been wrong before. I’d invest in the Nikkei because it’s actually tracking the Yen (frequently) as opposed to exhibiting a negative correlation. (TOPICS)Anyways That’s prolly a good bet...

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IPA
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November 6, 2017 at 3:26 AM ×

@Shane, something fun and interesting. Please don't assume I completely lost my mind. But... I am seeing a lot of wooly bear caterpillars crawling across my property from north to south and the ones I collected are almost all entirely black with very narrow brown band in the middle. Decent sample size, I got seventeen of them. Ole farmer's tale - if the body is mostly black with very little brown in the middle it means a very cold winter is coming, especially if they are crawling towards the south. Hold on to that nat gas position ;)

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November 6, 2017 at 3:40 AM ×

@IPA@Shane Ole farmer's tale - I'd like a dollar for every willy wag tail for the degree of their tale wagging in correspondence to the depth of hate for me in every snake in Eastern Suburbs, Sydney. (you'd know if you ever ran with them)

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November 6, 2017 at 4:05 AM ×

@Eastern Suburbs. Put that one down to experience.

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November 6, 2017 at 8:35 AM ×

@IPA I’m not letting that position off the hook until China is full up on Nat Gas...Finally treating me right that trade. Man I fucked it up earlier though. Bad habits resurfacing temporarily...anyways did anyone happen to scope the live cattle futures last week? An unexpected home run for the DOT. Just curious if anyone else put the trade on. @amp are you out in Sydney grinding? I don’t know how to do the calculations of your willy wag tail in correspondence to the depth of snakes hate out in Sydney. Sounds like it’s a drag.
@IPA dude I love willy worm caterpillars. Wooly bear willies where your from, huh? I dig it...I couldn’t help from thinking that your farmers tale might be a candle chart reference, but I’m not sure. Those dam webs they could spin were just stupid strong. Little brown midsection equals savage winter, got it bro. Saudis palace intrigues abound...sudden deaths and frozen accounts...this surely will rouse a bit of the artist formerly known as VOL, right....Gamma can ya hear me??? Or it could be another boring record breaking day through the close...strange world we live in.

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Leftback
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November 6, 2017 at 3:14 PM ×

Just a quick observation on JPY, Shane. If I am not mistaken, today might prove to be a reversal candle - as you point out, in the face of BoJ jawboning. When something starts to rebound in the face of the news, aligned with technical support levels, it is almost always a noteworthy event and often marks a turn.

We bought some upside exposure in JPY today, added a little to the vol trade. Yes, the Ghost of Mean Reversion will visit vol sellers (like Jacob Marley visited Ebenezer Scrooge) perhaps as soon as this Holiday season.

Technical momentum indicators have turned bullish for TLT. Just sayin'..... long bond, volatility, yen. The Yield Curve as well as the USD already suspects that the tax bill will be stalled or defeated. Equities (small caps) will get the message eventually.

Northman Trader had an interesting analysis this week on how the last few weeks have been full of Distribution Days. Someone is selling, very quietly, in the mornings, and it isn't tiny punters. A foreign central bank? Remember the SNB has been loaded to the gills with US equities. We only get to see changes in CB holdings long after the fact. This market will have a very very narrow exit corridor, especially once the fire starts in the crowded theatre.

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IPA
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November 6, 2017 at 4:43 PM ×

@LB, I swear every time Nasdaq makes a new high Sven is on CNBC telling everyone the same ole distribution story. I am not trying to discredit the guy but Peter cries wolf buy so many times before you shove him into the garbage bin, charts or no charts. Again, no disrespect at all.

The oil and gas stocks are on fire today. What, everyone suddenly discovered the hidden gems? I ain't complaining. The train left the station, broke the f*ck down, came back to the station for a repair, passengers disbanded, and then it left unannounced pretty much empty. Catch up trade takes on a totally different meaning. @amps is gonna eat me alive on that term ;)

Year end targets stay the same for me: OIH - $30, XOP - $40, XLE - $75, WTI - $60.

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Leftback
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November 6, 2017 at 7:24 PM ×

Fair comment, IPA, but distribution can continue for months or years. Spotting this while happening is a valid exercise, and is no less valid despite one's talent for timing the Dump. We all know when the Pump happens (futures market overnight and into the close)...

5s are back below 2.00%. Remember that massive short positioning in 5s? Yield curve flatter again. 2s10s 70 bps. 5s30s 81 bps. There are those (including pseudonymous blog proprietors) who like to mock, or at least question the relevance of, my YC obsession. Fair enough, but this is one of the more reliable economic growth indicators out there, but the slowdown follows with a delay of course. It's an early warning mechanism and it's free. Just use your eyes.

Now, if we were the Fed and we wanted to unload Ts from the balance sheet at the moment, what would we want to do? Unload at the front end, at which point the banks have to come in and buy those offerings, and stay mostly steady at the long end, so as not to send mortgage rates into hyperspace. For that reason, we think of balance sheet unwind as another Operation Twist.

HY spreads are a bit wider today. Keep an eye on that, EM credit (cough: China) and HY are frequently the sparks that light the bonfire. Now consider the fact that this bonfire has been spiked with accelerants (short vol and vol selling clown community). The fact that most people refuse to see that a bloody great big dry woodpile exists next to a stockpile of TNT is a bit alarming.

Penny for the Guy, Guv'nor?

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