Set-up: 1m virtual USD, exchange-tradeable instruments + FX forwards Target: max(0, EUR_Curncy_t / EUR_Curncy_t-1) + CPI PNL reporting: on Fridays Fills on Friday: *- half balance will be in EUR **- full + e-mini Portfolio annualized standard deviation of 4% (in pic), 99% daily var 0.63% over 1y horizon.
The 6CH7 and 6AH7 is an AUDCAD short from parity if looking at spot. My rate-differential + commodity price level model showed that it’s 7% overvalued. The CAD leg: CAD weakness against the USD shot up around late April 2016 when: USDCAD @ 1.25, front Brent around 48 USD, 10y swap differential 3 bps, 2y swap differential at -12 bps. Now we have USDCAD @ 1.31, front Brent 56.70, 10y diff at 44 bps, 2y diff at 40 bps. I don’t think that the change in rate differentials was sufficient enough to offset the oil prices and justify so much CAD weakness. Canadian fundamentals have been mixed since with deterioration on the inflation, improvements in growth and labour market, trade balance stopped deteriorating, and overall probably positive developments. AUD has strengthened versus rate differential since 16/01/2017, probably reaction higher S&P 500 and metals with markets ignoring the rate differential. When AUD/USD previously traded at 0.76 or higher, e.g. 19/04/2016, 10/08/2016, 08/11/2016, rate differentials were fatter, but SPX and copper were 7-9% and 15-20% lower. Econ fundamentals seemingly improved with lower unemployment, healing trade balance, but construction PMI is still below 50 and services PMI isn’t exactly high either. Speaking of Australia, IRU8 rate looks too high. Since the Trump victory IR3-IR7 spread has gone 20 bps up from 13 to 33, while ED3-ED7 has gone up +28 from 18 to 46. RBA aren’t hiking, so this feels like risk-premium, which needs to be milked.
bought 10 LU7 (sep17 short sterling) @ 99.57. Boe were explicit in the last statement that they would cut if consumer was weak and inflation was low or hike if inflation got out of control. Yesterday's and today's cpi/wages data aren't pro-hike. LU7 is 6.5 bps above is LH7, so positive roll-down + a lottery ticket that something bad will happen to the economy as soon as disastrous retail sales on Friday.
sold 20 ZQJ7 @ 99.285. April fed funds is 6 bps above February, so 25% probability of a March hike. Janet L. Yellen, Board of Governors, Chair - unwise to postpone hikes- 14.02.2017 William C. Dudley, New York, Vice Chairman, aim to hike rates based on growth and fiscal policies - 15.02.2017 Lael Brainard, Board of Governors - could have to hike faster if fiscal spending gave econ a boost - 17.01.2017 Charles L. Evans, Chicago - move on with 2 hikes - 03.02.2017, 3 hikes appropriate - 09.02.2017 Stanley Fischer, Board of Governors - uncertainty around Trump plan - 10.02.2017 Patrick Harker, Philadelphia - a March hike makes sense if data doesn't disappoint - 06.02.2017 Robert S. Kaplan, Dallas - wait & see mode - 12.02.2017; gradual hikes and not incorporated fiscal plans in his outlook yet - 12.01.2017 Neel Kashkari, Minneapolis - not in a hurry to hike rates Jerome H. Powell, Board of Governors - more fiscal policy and less monetary policy is good - 08.01.2017 Daniel K. Tarullo, Board of Governors - I hope his replacement will be more talkative for hike: Harker, Evans against hike: Kashkari unknown: Yellen, (Powell and Tarullo vote the same) conditional on Trump delivering the plan he promised this week: Dudley, Brainard, Fischer, Kaplan 25% seems too low to account for three uncertainties: econ data upside potential, Trump actually delivering, my reading of Yellen being hawkish in the last testimony. Tomorrow gonna try trimming the RXH7-IKH7 from 3 contracts to 1-2 as the itl-bund has narrowed around 10 bps since 10/02/2017.
Weekly PNL: 0 USD on EDU1-EDU2 -30 USD on short AUD/CAD +1031.25 USD on EUR/JPY +900 EUR on Italy-Germany spread narrowing -2000 EUR on Schatz cheapening to EURIBOR via DUH7 and IZ7 -1800 AUD on lower AUD short-term rates (via IRU8 short) +480 GBP on higher probability of a BoE rate cut by September. -5 USD on betting on higher odds of a March Fed hike via short ZQJ7 Overall for the week: +997 USD, -1100 EUR, -1800 AUD PNL, +480 GBP. -0.23% for the week in USD terms. Didn’t reduce position in BTP-bund as mentioned in the above post cus was too busy with other stuff in the morning and the spread has widened again a few h after the open (I try writing down entry/exit to avoid cheating myself “closed it on open” after seeing position going negative). Saw a headline that it was France-driven. This could make sense as CAC underperformed, EUR was down despite rate differentials in its favour, losses on schatz-euribor. 57-43% for Fillon-Le Pen (Opinionway) too dangerously tight but it’s been this tight for quite some time. Raggi lost another official in her office, but does it help Renzi much to swing elections in his favor? Maybe it made more sense to go long BTP vs OAT, not BTP vs Bund, to isolate the election mood. GBP retail sales data made me more comfortable about LU7 position. Could update the Fed sayings above with Fischer refusing to say if he expects two or three hikes. Kinda dovish.
Target 99% daily Var of 1% (10k usd). This is discretionary, so I don’t know if this has positive expected return at all. I suppose discretionary trading in liquid instruments is good with Sharpe of 0.9-1.5, so translating 99% daily var of 1% into expected return under SR of 1 would be 7% annual return. If every idea reached my target level tomorrow, current portfolio would gain roughly 8%.
No, both are short the EMU collapse. Schatz/euribor is a bet that it it’s election-driven and goes back to -40 (CTD yield vs EUSA2), not collapse to -110 a la 2008 or 2011. People got burnt with Brexit and Trump predictions, so they will be overestimating Le Pen odds now. IK looks too cheap against RX given that Italian and German stocks have done well and versus credit pricing (BB OAS). EURCHF isn’t signaling troubles anyway, merely 1% down since this all started with Fillon prosecution on 25/01/2017.
So you're short Schatz asset swap AND long 10y Italy vs Germany? It might get interesting if things don't go according to plan... I agree that IK is too cheap, but I wouldn't wanna be short Schatz, especially given the negative carry. At any rate, this is an interesting exercise. I wish you the best of luck. EDIT: I couldn't see the table in the original post before now for some reason. Now it's all much clearer.