As the Market Turns II....Time to short AUD?

I know there are more than a few of you that have been disappointed not to see an Economist piece this week...but crikey, it was a bit of a snoozer this week. On the cover….the German current account surplus? This is breaking news? Next week...Leicester City closes in on the title….I wonder if they kept this one in the hopper for the week when there simply wasn’t anything else to talk about.


Getting down to business...Yellen delivered the requisite “kinda, sorta, we mean it, but we are looking at inflation” speech that should be standard issue by this point, but seemed to catch the market a little off guard, or perhaps more accurately, gave a few fast money types an excuse take some chips off the table before that two-weeker in the Hamptons.


Meanwhile, Bunds didn’t really decide what to do with themselves...but the day is coming. You don’t see this kind of selloff every day--tough to believe this is going to be the new range. Seems more likely to me we’ll see a consolidation back towards the 40-50bp range until we get a better clue on the next moves for the ECB, or more data on growth, inflation, etc.

Meanwhile, Canadian rates followed along reluctantly--tightening 2-3bps in the belly after Poloz went ahead and pulled the trigger on the first rate hike since The Red Green Show was still on the air. The media rhetoric on the statement was relatively neutral, no real smoking guns--no mention of housing prices, and some emphasis on the broad-based nature of the recent pickup in growth.  


I haven’t torn apart the quarterly report yet, but I am looking forward to it! In the statement, the fact Poloz wanted to highlight “recent data has increased confidence the economy will continue to grow above potential” is important, since it was the lack of momentum to close the output gap that caused the BoC to keep kicking the can down the road on rates normalization.
That gives us a nice segue into FX...CAD continues its impressive run, weighing in as the G10 champion since the global rates selloff began on June 23.


Commodity currencies aren’t really moving together--CAD obviously leading after the bike, but some diffusion between AUD, NZD and NOK as well.


AUD stands out a bit for me here. The industrial metals Australia cares about aren’t doing much...and are holding in near YTD highs despite the downward pressure in energy prices. Natgas exports mean that fall in energy prices isn’t a big a boon to terms of trade as it used to be, but it is still positive.


Given Yellen didn’t really say much to throw cold water on the Fed’s stated plans, and risk markets are as healthy as ever, I’m looking to get long USD. Looks like a nice entry point here vs. AUD, and sets up nicely if you want to get short the China credit story.




The toppiness of that chart seems a little overdone given how rates have been moving in lockstep, despite the US engaging in a hiking cycle (such as it is, post-QE)

But is the RBA about to throw open the flood gates on HawkTalk 2017?


If they are, no sign of it yet. Safe to say there is virtually nothing priced in to the curve for the rest of the year.


“Underlying inflation” is checking up off the lows as it is in a few different countries, which could be worrisome for an AUD short...


But growth figures have been lousy...


And wage growth has been even worse.  The RBA is going to be in no hurry at all.
So in a boring, low vol market, short AUD looks like a good, low carry way to get some risk-off exposure while potentially setting up for a larger move if the Australian miracle is finally coming to an end and/or some air comes out of the China bubble in the upcoming weeks and months....or if we simply see a USD resurgence on the crazy notion that these guys are actually hiking rates, rather than just talking about it.


Not a strong view here, but a good starting point. Will dig deeper next week.


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checkmate
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July 13, 2017 at 7:49 AM ×

http://www.telegraph.co.uk/news/2017/07/12/theresa-mays-government-could-come-apart-like-chocolate-orange/

Precisely !
Sat and watched a very good large cap UK rally yesterday ,but noted mid caps were flat. Summer kind of rally for people not looking beyond the day or the week. If the wheels come off this Tory government and another election is called with Labour the front runner they will all get buried. Algos will have a field day.

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checkmate
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July 13, 2017 at 10:16 AM ×

I also note that whilst the large cap rally yesterday looked impressive on the surface the volume was distinctly summertime lightweight.

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July 13, 2017 at 12:18 PM ×

That gilt bund spread looks interesting. Reckon it can go a lot wider.

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Skr
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July 13, 2017 at 12:22 PM ×

Shawn, as I read your last two blogs and comment section, I have been somehow reminded of the Selena Gomez scene in the "Big Short" movie.

How much of the actual underlying is being bought (pension funds and CB's) and how much is multipled into bets on what is going to bought or already bought. Then you have the bots betting amongst themselves on those bets.

As mentioned previously - the SEC are hard at work, slapping wrists.
Also mentioned is low volume, but there is plenty of money been made to the context.

What happens when nobody buys the underlying anymore?

https://youtu.be/ZM_LYusnXk8

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Leftback
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July 13, 2017 at 8:04 PM ×

Not sure about short AUDUSD specifically but I will second the idea of a little long USD trade here. Perhaps just long UUP or, for a bit more leverage, maybe short EEM or EM debt is a simpler way to express that view, yesterday's relief rally notwithstanding?

Strange dissonance recently. DX has been declining since March but US2y rates have risen over the same period. It's probably time that those bedfellows reconnected, especially once the market sees that any tapering by the ECB will be v-e-r-y gradual (because, like they don't want to blow up their balance sheet either). We might see a mild summer flattener (long end rates fall a bit, short end is likely to be anchored by Fed hike expectations) along with a firmer USD in the coming months.

I'd say the EURUSD has come to the end of this little run higher. If you want to punish any currency in particular, CAD has been overbought and GBP is going to crater once we find that the BOE isn't going to move, despite the latest inflation spike.

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Leftback
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July 13, 2017 at 10:02 PM ×

Even the mainstream financial media have noticed that volatility is now at 50 year lows by some measures:

http://www.marketwatch.com/story/stock-market-hasnt-been-this-quiet-since-lyndon-b-johnson-was-president-2017-07-12

Shares outstanding in xiv have soared. Take a look at the charts for vix, xiv and svxy. Low volatility is now another huge bubble.

It is instructive to view the three year charts for these things and to see how quickly the calm conditions of June and July 2015 (which resembled the current environment, VIX ~12) gave way to the volatility spike of August 2015, and how a significantly higher volatility regime persisted into February 2016. The August spike was short-lived and wouldn't have killed most vol selling punters, but the 3 month long grind up in vol from October 2015 into January 2016 probably saw a lot of vol shorts carried out on stretchers. Of course, those were mainly pros at the time, and it hadn't become a national sport.

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Shawn
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July 13, 2017 at 10:22 PM ×

@ skr, funny you mention Selena Gomez--a friend mentioned that metaphor when I posted a piece about the situation in Venezuela a while back. I said I am much more the Richard Thayler character that plays blackjack with her. Per your broader point, I certainly have my troubles with much of the regulation of the past five years but centrally cleared derivatives was a good and necessary innovation. So i don't think there is the leverage on leverage there was in the 2003-2008 era. As ever, when you push on one piece, the bubble pops up elsewhere.

So yeah, @ leftback, I agree long USD at large...decent company can disagree on the expression--CAD seems like a risk to run a bit more on rates (even if I still don't think it will happen). GBP is a good fade too...I just like the commodity/china component you pick up in short AUD. Re: EMFX--yeah, any broad move to stronger USD is going to be levered in that space--so take your pick of anything that has been en fuego.

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July 16, 2017 at 1:17 PM ×

Before I go on holiday's TMM, I just want to give a shoutout to our pal Rick Santelli down at the Chicago trading cesspit.

Hey, Rick.....thanks for sending my stock XXX into bankruptcy last week. The negative chi you have expelled towards my stock for years was soooooooo easy to find and follow for Wall street investors that there is no way it's ever coming out of bankruptcy, not even a chapter 11 can save it!
Rick, you have outdone yourself this time.....looking forward to your next capital venture.....I hear low to mid end size joyhouses are all the rage on Parramatta Road these days. Good luck with it.

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