Much ado about nothing

OK, well that went according to plan. The BOJ hiked but intimated further tightening would be modest in scale and slow in execution. As anticipated, JGB yields and the yen both rallied on the news (or, more specifically, a pre-meeting leak from the NHK TV station) but sold off swiftly thereafter. From here, the base case is probably a slow grind lower in the yen for another couple of weeks before risky-asset threatening data comes to the fore again.

Five Things I Think I Think (apologies to Peter King of Sports Illustrated)

* Macro Man wants to be short sterling, but cannot bring himself to pull the trigger at current levels. While price action following the BOE minutes (7-2 vote in favour of steady policy) suggests that the market remains long sterling, it is unclear how long the pound can underperform in a broadly pro-carry environment. The Lazarus-like recoveries of the Aussie and Kiwi dollars are instructive here. The moral of the story: sell sterling on strength, not weakness, unless risk appetite falters.

Surely a sign of the apocalypse: London is accepting foreign aid from Venezuela!

Is EM putting in a top? Yesterday’s CPI linker auction in Turkey was instructive. The competitive bids were awarded at a real yield of 9.72%, way below the pre-auction estimate of 10.5%. Bid to cover ratios were extreme. These bonds, as well as the lira, are now lower today. Turkey has a contentious presidential election in less than three months; recall how well Mexican assets and the peso fared last year. Macro Man would like to find a way to be short Turkey without losing his shirt. More thought is required here.

* On a pickup in economic activity (such as that Macro Man expects to emerge in a few months), the Dow Transports should fare well. However, the trannies have already put in a strong performance vis-à-vis broader indices. This trade, then, is one for the future; Macro Man will keep an eye on the Transports and look to implement an RV trade on a broad market pullback

* Markets feel like they are waiting for a catalyst, but don’t know what that catalyst might be. Macro Man is surprised at how slow this week has been, even accounting for Monday’s holiday. Most people that he speaks to have relatively little conviction and want to sell options. Normally this is a warning sign; however, selling options has been the right trade since July, a remarkably long time. Despite the strong performance of the portfolio, Macro Man is more nervous now than he was last year when he hit a rough patch. What does this mean?

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Click here for comments
February 21, 2007 at 8:42 PM ×

Post-BoJ , I guess we can all breath a sigh of relief that the carry-trade is well and good for another 3 or 4 months

......and of course......
that Hugo Chavez's such a swell guy

Congrats bro Anonymous you got PERTAMAX...! hehehehe...