Monday, 28 July 2014

28th - RBNZ and stuff.

Last weeks big event was clearly the RBNZ... hiking the OCR to 3.5% (+25bps), yet in the statement saying how they will pause any further hikes and look to see the impacts of this 100bps hiking cycle. Furthermore, the RBNZ really changed their tone with regard to the NZD... even suggesting intervention (but that worked so well to weaken the NZD every other time....)

Looking at the specific times of each headline, and a tick chart of the NZD during the RBNZ, the major drop came after the stronger language regarding the NZD. However, while this language was a little stronger than usual, its nothing new... Wheeler has bitched and moaned about the strength of the NZD throughout the entire hiking cycle, but only now does the market listen.

Looking ahead, the NZD is sat an important cross road, with a confluence of support at current spot prices

NZD technical chart
There was heavy selling via leveraged players as recorded by Citi, and on the Reuters Matching engine there was 5-10x normal volumes post RBNZ. So clearly a lot of money behind the recent leg lower, however what I am concerned about is how uber-bearish everyone has become all of a sudden. Because, frankly, nothing has really changed. Most people expected a pause in hikes, we got that. Most people expected Wheeler to express concern wrt NZD, we got that (and a little more). So really, to me the continued weakness is on fear of intervention. Something which the RBNZ has done multiple times (last May namely) and failed.

The overall environment is still very carry positive, being gauged two ways, firstly :

NZD (red) vs G10 implied volatilty (white)

The relationship between the NZD and G10 implied volatility is still strong, albeit a marginal divergence in the last week. Without implied volatility ticking up meaningfully (scale inverted btw) I struggle to see *too* much downside in the NZD, as managers will look to pick up carry (with NZD offering better rates than some EM).

Another way to look at this, is Carry/Vol:

NZD (red) vs Carry/vol (white) 
I'm looking at 1Y swap spreads over G10 implieds here, and its a good theoretical (and practical) reason as to why the NZD is where it is... However, since the RBNZ the two have diverged substantially, because carry didn't exactly drop much (2yr swaps dropped what, 4bps) and implied volatility certainly hasn't picked up.

NZ 90-day bank bill 3rd contact out (continuous, currently M5s)

NZD 90-day bank bill curve last week (purple) and spot (yellow)
Here we can gauge the impact of the RBNZ on the short end rates. With the NZ M5s dropping the odd tick, but still much, much higher. Secondly the futures curve dropped the odd basis point, i.e. the pause in hikes, was no surprise to the rates markets as it was mostly priced in.

However, don't get me wrong here, I am bearish the NZD in the longer term. What I am saying is, don't chase it lower here, because in the short term there will probably be better prices to load up short. As we move into September and beyond, implied volatility is likely to turn higher and US short end rates are likely to pick up further, and this is when we could see a larger decline in the NZD. But for the meantime, carry remains attractive, and the NZD appears "cheap" for carry traders. So holding off shorts may be the more tactical play now as we could see some short covering from leveraged players, and some carry related demand.

On the theme of carry, the Grandpa of twitter (Mr. Morski) sent me this chart last week
TRY, BRL, ARS total return since 1995
It really goes to show the power of carry in the long run (TRY spot price has dropped some 98%, yet return is 1600%) and is a stark reminder not to be on the paying side of carry for too long... Timing, as with options, is critical with being short carry.

I spent a lot of the duller moments last week reading back over the 2014 outlook pieces from various sell-siders, and even though we give then a lot of stick, in general they've done reasonably well on their recommendations and predictions.

Now there are some clear areas that they have got wrong, volatility definitely didn't tick upwards on diverging monetary policy, however this hasn't actually meant their ideas have failed.

Playing this monetary policy divergence was how we were told to position this year, and when we hear about the terrible performance of Global macro funds, especially in the FX markets it seems weird.

Pct Change (vis a vis USD) YTD [y] vs bps change in 2yr swap YTD [x]

*"the line" +r^2 is on purpose :)
As we can see, there is a strong relationship between a currencies performance, and the move in its short end rates, as we'd expect. The only outlier, is the AUD which, even though their rates have dropped this year, remains the strongest ccy YTD.

However, going into this year, it didn't take a rocket scientist to realize where rates were going in these countries. It was obvious that with disinflation/deflation in Europe/Sweden that rates would be cut, likewise with the RBNZ hiking, the UK economy on the verge of hiking and the improving US it comes as no surprise to see their currencies stronger on the year.

For this reason, I find it odd that FX macro traders have struggled so much this year... as playing this move has paid off as below.

Basket playing the divergence b/w rates YTD.
Going on to weight the components according to the size of the move in 2yr swaps (which makes sense as we aren't going to equally rank a currency whose rate dropped 5bps, as one whose dropped 25 etc)

Weighted basket YTD
Basically, no excuse to be doing poorly is you're a "macro" trader expressing views through FX so far...

In other things, a few charts just to keep an eye on.

EUR real money selling continues, and we trade pretty much on par with the 1Y swap spread. However look for short covering into the data fest on wednesday and beyond. However, I still feel Yellen will likely surprise to the hawkish side, and I am also bullish on US macro.. hence I do not want to be short USD in any size, and particularly not past wednesday. So playing any short covering will have to be quick and tight.

EUR vs 1Y swap spread

Large 1.35s going off this week, mostly towards the back end.


USDCAD trade highlighted a few weeks ago doing v.well indeed, and I especially like being long USD into the second half.

USDCAD vs model (+techs)

USDJPY still range bound, looking to buy vol very soon. 3M straddle shows good value (as per blog as few weeks back) and Ideally I'd like to get long sometime this week.

USDJPY daily
US 2 year rates likely to head to 0.75% by year end. Supporting the USD against G10.

US 2 year bond yield
US5s30s still flattening...  now nearly 150bps. Keep an eye on it.

Us 5s30s
This week is likely the most exciting of the summer months, with Wed/Thu/Fri filled with plenty of tier 1 data releases from US GDP/FOMC, EZ CPI, CNH PMI, US NFP and more.

In completely unrelated things, only 17 more days ... FUCKKKK :s

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