Short GBP?

The UK macro picture has improved hugely in the past 6 months, forcing interest rate expectations up hugely as shown by the shift in 3M LIBOR expectations.

UK historical STIR curve from Jan vs real time and spread in red.

This view is supported by the very strong PMI readings and decent labour market readings, all in all the near 10% rally in the GBPUSD over the past 2.5 months has had a strong macro footing, However I see it unlikely to keep pace and there are starting to be signs from the Credit markets that this is the case.

GBP technical view, Citi Macro surprise middle pane, Stochastics bottom.

Here we can see that the GBP is running into 5 year resistance and strong supply above 1.62 through 1.6250 and this will definitely slow progress higher, this combined with overbought stochastics suggest upside is limited for now.

There was also very large volumes in GBP today (possible distribution top?)

Reuters Matching relative volume

This week we have important PMIs and I have a feeling that they'll disappoint, especially considering their strength of recent months that sort of momentum will be hard to keep.

Furthermore the aforementioned Credit view is seen here, the GBP vs (UK vs. US) yield curve spreads

GBP vs GBP model, large divergence occurring now

As we can see there is a lot of resistance for the GBP and the path of least resistance is lower - plus I don't mind holding long USD at this point, so that's why I'm in GBPUSD shorts as opposed to EURGBP longs.

Here is a quote from a Goldman Trader on today's Moves

"The most widely telegraphed flow of the year later this afternoon and no surprise cross trades softly - aided by the general risk off tone and political instability (although hardly new) in Italy over the weekend. My inclination tells me cross won't collapse from here and if anything we should be looking to reduce longs in sterling at these levels - cable should struggle to break 1.62 while EURGBP, although technically looking vulnerable below 0.8350 has severe snap back risk later today with month end also confusing the issue. We still like sterling but not at these levels and the easiest trade right now feels to observe and wait but risk reward here and now is to be short sterling tactically."

My trade is as follows - Short GBPUSD at market 1.6190. SL on a close above 1.63 with targets around 1.59

In other news.... BTPs had an exciting day lol

Big moves in the Fixed income markets

So the headlines were as follows from the FOMC

*FED SAYS ASSET PURCHASES ARE NOT ON A PRESET COURSE AND FED DECISION ABOUT THEIR PACE REMAINS CONTINGENT ON ITS ECONOMIC OUTLOOK, LIKELY EFFICACY AND COSTS

*FED SAYS TO KEEP BUYING $85 BILLION IN BONDS PER MONTH, SPLIT AS $40 BLN MBS AND $45 BLN TREASURIES

* FED SAYS TO KEEP FED FUNDS 0-0.25 PCT AS LONG AS JOBLESS RATE ABOVE 6.5 PCT

*FED SAYS RECOGNIZES INFLATION PERSISTENTLY BELOW 2 PCT COULD POSE RISKS TO ECONOMIC PERFORMANCE, BUT ANTICIPATES INFLATION WILL MOVE TOWARD OBJECTIVE OVER MEDIUM TERM  // hints of Japan?

Either way - what we got here was far wide of consensus which was for a $10bn cut in tapering split equally through MBS' and UST's. But this is clearly not going to be considered until December now.

First off, clearly UST's were going to benefit hugely and we saw the 5's yield drop the most (in terms of bps) since March 2009

And, in my opinion, more importantly the US 2s10s tightened from ~250bps down to 235bps on the news as the long end was heavily bought, but at the same time the US 5s30s steepened considereably from 218bps to over 232bps

Furthermore in terms of inflation protected bonds - these were very sought after with the 10's ending up over 2%, pushing the yield down from 0.72% to 0.49%

Overall, it's been a big day and in all honesty, with 2 months to go before the next taper consideration, we could very easily see the 10Y benchmark trade lower towards 2.5%

Charts that make you go hmm...???

First of here is an almost 20 year look at the Nikkei vs the 10Y Japanese IRS

As we can see, for the past 4 attempt of this downtrend, the IRS (red) has stayed low while equity prices have rocketed up. Is this time different?

Now we can consider the US 10's vs the Dow 30. Makes you think...

On a smaller timeframe - here is the Dow today, vs the Dow of July/August 2011, a very similar H&S pattern forming. Coincidentally both around important Fed moves (2011 was QE2 ending) and we are facing FOMC tapering potential tomorrow so who knows??

2 Year bond yields

The importance of short term interest rates on the FX rates is undeniable and quite clear. Below is a YTD chart of the yield differential between the Us and German 2 Years vs. the EURUSD

EURUSD white, USDE2 spread Purple. Thomson Reuters

But we are at a very important point in the yields as we go into possibly the most important NFP of recent times. The consensus is a strong NFP (>175k) will be met with a guarantee of tapering in September as opposed to later on. 

But where does this put the Yield spread as this will have enormous influence on the FX rate, as we can see the US 2's broke above the two key levels approximately at 0.44%.

Us 2 year yield. Bloomberg

As we can see, there is definitely potential for the the yield to move higher, possibly to 0.5% and even higher.

But when we consider the Germans then it seems the ECB is the limiting factor for now

EUR EONIA 1Y1Y forwards. Bloomberg - H/T Nordea research.

As we can see by the EONIA forward, the ECB refi rate seems to be capping any further advances and this has a clear impact on the German 2 year yield as we can see below

German 2 year yield. Thomson Reuters

So what we can conclude is that from this is that we can see the German yields will struggle to move higher (although if tapering does occur I expect it to still break higher, just with more momentum).

And so if we get a much higher Us 2 yr yield ~0.6% by October is entirely possible. This, given recent correlation would imply a EUR/USD of approximately 1.2750.

As it stands I'll go into the "Septaper" event Long Schatz and short US 2's. As it stands now, the "price differential" on the futures is 0.3766. I am looking for a widening to 0.65 differential.

By buying FGBSc1 at 110.27 and shorting TUc1 at 109.89 (decimalized ofc) 

At the same one could consider hedging by buying EURUSD