Macro Man's decisions to close the Bund straddle and stick with the short sterling positions were both vindicated today, as the Bank of England left rates unchanged and Trichet dropped the V-bomb with his opening salvo in the ECB press conference.

To quote Hannibal from the A-Team: I love it when a plan comes together!

The short sterling position is now (gasp!) in profit since inception. Macro Man is slightly concerned, however, that the market is over-reacting to the unchanged rate decision. After all, very few economists actually forecast a rate rise, and very few risk-takers that Macro Man spoke to looked for anything, either. Next week sees the release of the quarterly inflation report; fan charts showing upside trajectories to growth and/or inflation, a not inconsiderable risk, would likely send the short sterling strip careening lower again.

Given that Macro Man is having a good start to the month and won;t be around to manage the position, a change in tactics would appear wise. Macro Man therefore takes profits on the L M7 position at 94.22. In the event of a crackback in the strip, he will sell 1000 June 94.125 puts at 10 (futures) ticks. Macro Man reckons he could sustain two rate hikes and still make money on the trade at that price.

Elsewhere, Trichet might just as easily have said "we're gonna hike next month." Why he plays these rhetorical games with the word 'vigilant' is anyone's guess, but at least it gives us something to do once a month. For choie, Bunds should be a sale, but they may struggle to come off with the Treausury market looking bid. Perhaps as a spread against's inventory data suggests decent downside revisions to Q4 GDP, and he continues to look for a soft Q1 on de-stocking.

Macro Man will sleep on it and may do the trade tomorrow.
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Click here for comments
February 8, 2007 at 7:38 PM ×

Do the #'s justify a hike in March ? Is Trichet just talking up the Euro ?

Macro Man
February 8, 2007 at 8:46 PM ×

No, Trichet is not talking up the euro. Certainly credit growth in Europe remains robust, and sentiment in the region remains fairly upbeat. It's not difficult to justify putting rates up from their current modest levels; I find it a bit more difficult to justify playing thsee stupid word games.