PIS are alleviating my concerns that PLNHUF would not come back to 70-71. PLN with an independent central bank and rather moderate wage growth looks like a good carry trade against a central bank easing into full employment and wage growth way above productivity growth to help out pals in the office. Week 17/07/2017: EDU1-EDU2: -1500 USD Long AUDNZD: -1290 USD < looks like I was not the only one surprised by the move Short EURNOK: -15 USD Short EURCZK: -72 USD Short GBP, short long gilt: +1825 USD, -1130 GBP (Closed) Long bund against gilt: +2680 EUR, -2800 GBP Short bund against ER Z0: -215 EUR ER Z7-Z8-Z9: +2625 EUR Overall: ~-285 USD
24.07.2017: EDU1-EDU2: +3000 USD Long AUDNZD: +260 USD Short EURNOK: +1735 USD Short EURCZK: -610 USD Long bund against gilt: -1000 eUR, +600 GBP Short bund against ER Z0: +900 EUR ER Z7-Z8-Z9: +750 EUR Total: ~+5931 USD
10s30 looks fairly depressed historically, so let’s try a UXY-WN steepener: short 5 UXY U7 @ 135.359375, long 2 WN U7 @ 166.1875 (53bps spread). EUR looks too strong against the rate differential and too much momentum (more than 10% up without 2% pull-backs), so short 2 6E U7 @ 1.18105. USD losses seem more limited from hike pricing perspective now with ED1-ED15 at 80 bps closer to summer 2016 lows of ~40 bps than Dec16 optimism of 160bps. I am also curious why Spanish 10y yields so much less than BTP 10y. Labour market healing is already slowing down in Spain and I doubt that they will be able to reduce it significantly by the time the cycle turns over. Good luck entering recession with double digit unemployment. Trade balance data shows that Italy is also more competitive. I suppose people focus on banking sector, debt/GDP and 2018 elections. Eurex bonos are too illiquid for some reason. 12 cents in bid-ask to get 2 lots. Week 31.07.2017 EDU1-EDU2: -750 USD Long AUDNZD: +1200 USD Short EURNOK: -1738 USD Short EURCZK: -775 USD Long bund vs gilt: -660 GBP, +2300 EUR Short bund against ER Z0: -1300 EUR ER Z7-Z8-Z9: -750 EUR Total: ~-2643 USD
bought back 2 6n u7 @ 0.7330 (+2 6AU7, 0 6NU7 now). sentiment seems too bearish on nzd. will reestablish the position when the dust settles
kinda useless to give reasons after the event but the rationale was: - some folks are talking about rate cuts. - q1 2018 CPI projection of 1.1% not too high (now updated to 0.7%) - 2s5 off 70+ bps high to 50 bps (where it stood right after trump election) - both manufacturing and services PMI are good - biz confidence is high relative to 2016 h1 - visitor arrivals are good - consumer sentiment solid - fonterra milk prices improved vs previous year - global outlook better bad stuff: - trade balance worsening - retail sales slowing down - credit growth slowing down - weak CPI duh other: - wage growth neither falling nor accelerating - house price growth slowing down, housing permits low. I don't think Wheeler will be too dovish at the press-conference. It takes worse data to change the trajectory.
didn't get to a chance to re-sell nzd due to mcdermott's comments and missed on aud/nzd long. cut size to +1,-1 now. - sld 6a u7 @ 0.7881 - sld 6n u7 @ 0.7273
I looked through pricing of hikes during hikes in currencies with exchange-traded STIRs for approx. last 15 years. I could not figure out how to quantify using data sets when the hikes got into the priced , so I looked at graphs and summarized the findings of market expectations with some discretion as: right, corrected and wrong. Right expectation is roll-down sufficiently high to avoid losses from going long white/red contracts. Corrected expectation is a sell-off in white/red/green’s either shortly before a hike or in the beginning of a cycle to correctly price the remaining hikes. Wrong is STIR yields trending up as market realizes after each hike that it was not actually the last one. In my unrepresentative sample that mostly covers mid 00’s global tightening having the hikes in the price was an exception and not a norm. In most cases there were sell-offs a few months before the hikes to give provide with at least some roll-down against the hikes, but in some cases the mispricing was egregious (BoE 2006-2007, RBA 2006-2007, Fed 2005-2006). Sometimes it worked to go long the futures for at least some time after the first hike (Fed 2004, RBA 2002, BoC 2002, BoC 2004, BoE 2003), but led to losses if keeping the long for too long (Fed 2005-2006, BoC 2005H2, BoC 2003H1, BoE 2004H1, RBA 2006-2007). I have also looked at currency moves during expectation adjustments. Most of the time currency direction during tightening expectations was in line with theory: tightening -> stronger FX. The notable exception was GBP weakening in July 2003. Would be interested in quantifying this to add some rigour cus looking at graphs leads to slightly different conclusions every time I look at them. --- Q2 oil demand did not go down, so it’s a seasonally strong result. Production surplus stood at 0.4m bpd. Now in q3,q4 we get some 1.6-1.9m demand-pickup using OPEC forecast and over 3m using historical seasonality, then 1.3m more bpd demand in 2018 (opec forecast). OPEC members that produce now less than they did in Aug-2016 (ex Venezuela) could add back some 900k bpd, Russia could add back to 300k bpd. US, Canada, Mexico, Venezuela could pump more, so it’s not clear if 2018Q4 will be a deficit/balance/surplus of production. A more interesting question is where production will come past 2019. In 2016 Saudis said that they could produce 12.5m bpd (900k above aug-2016 peak) but investments were needed. Libya could easily fill the gap if political environment was fixed (1m+ bpd). Iraq could probably add some 500k, Nigeria 500k+. Essentially every country getting to its capacity is sufficient to meet the demand. Almost flat Z8-Z9 and Z9-Z0 suggest that the market expects that there will be sufficient supply in 2019-2020. It seems hard to form any strong view on this top-down without knowing the projects in development and rate of depletion of older fields. --- 07.08.2017 week Typo: +5 UXY, not -2 WN EDU1-EDU2: -750 USD Long AUDNZD: +80 USD Short EURCZK: -622 USD Short EURNOK: -615 USD Short EURUSD: -825 USD UXY-WN steepener: +703 USD Long bund vs gilt: -2620 GBP, +2820 EUR Long bund vs IR Z0: -1790 EUR ER Z7-Z8-Z9: 0 Total: ~-4221 USD
ED7-ED11-ED15 looks quite depressed now at zero bps, ED7-ED11 and ED11-ED15 both at 17.5 bps. It traded at -3 bps last summer but stood at above 15 bps in December on more aggressive hiking expectation. Using naïve max-min of 15 and -3, this looks like a good asymmetric 5-1 bet on inflation picking up with no rolldown costs. The problem I have with this idea is that it’s negatively correlated to my ED19-ED23 widener (by now it’s more like ED16-ED20) that is supposed to perform if 5s10 bear steepens for whatever reason. I am still puzzled why many EM currencies are so non-responsive to central bank meetings. New case is Thai central bank adding on Wednesday a clause to MP statement that they are not comfortable with the baht strength, yet there was no reaction. 30d realized vol of 3%. In MYR it’s even less, 1.5%. Another thought that has bothered me for a long time is why exchanges add so many futures contracts that end up being zero volume, zero open interest contracts. Bank Neagara complaining about SGX offering MYR/USD had me excited, but as usually it’s another poor liquidity contract. Week 14/08/2017: EDU1-EDU2: 0 AUDNZD: +270 USD EURNOK: +1805 USD EURUSD: +1625 USD EURCZK: +817 USD UXY-WN steepener: -797 USD Long bund vs gilt: +460 GBP, -360 EUR Long bund vs ERZ0: +170 EUR ER Z7-Z8-Z9: - 375 EUR Total: ~+3648 USD
yes and no, that's what I thought even though it was stupid. The initial benchmark included performance the "best-of" currency, EUR or USD. diversifying into two made sense to minimize underperformance. I simplified it to 100% USD because: 1) vol from the pair distorted analyzing p/l from other positions, 2) it's a lot better to keep usd balance and buy 2x eur/usd calls. Quite conservative estimate is that it costs 2% per year but removes this wild currency risk.