Tuesday, 1 July 2014

I'm Back! 1st July

I'm back, and I have not missed much! (not sure if I am happy or sad about that), but the outlook for the summer doesn't look great, even JPY 1 month vols trade with a 4 handle ffs... oh and EUR 1 months trade lower and lower day-by-day. Now currently at 4.25 (an all time low of course!)

G10 and EM 3 month implied volatility.
So the future doesn't exactly look bright, and I can't see why we won't see a boring summer with things going like they are now.

However there are still some identifiable themes, that maybe if they play out, the summer won't be so bad.

1st one builds off my most recent post from back in April "long look at the CAD" here. I thought the CAD looked like a good buying opportunity. Now I think the complete opposite, but in fairness the CAD has risen just shy of 4% since then, which given today's slow environment, feels more like 10%

A lot of the rationale in April, was that the CAD was the most shorted currency (by most measures) and we have since seen a decent round of short covering, and some speculative buying (especially as inflation has ticked up, something I highlighted back in April).

But now we sit fairly neutral, and seemingly at a bit of a technical cross-road.

USDCAD daily chart
USDCAD is pretty much sat at what could be interpreted as strong support levels, not only this, but stochastics are lowest in many years, suggesting that at least in the short term, we could be due a pull back.

Another important factor is that off yield spreads, which can be seen below.

USDCAD vs 5 year rate spread
Here we can see a sizeable disconnect in the past few weeks between the USDCAD, and the 5 year rate spread. Given its incredibly strong relationship in the past, it could either be going the way of the once famous "EURUSD vs 2 year german/us spread" however I think this is less likely, and I do think that the USDCAD proves to be good value at its current levels.

The final chart for the CAD is that of the USDCAD versus implied volatilty. This is because, while a spot trade is easy and simple enough, maybe with volatility so low, this trade might be more favourable via options.

USDCAD vs 1 month vol 
we can that as Implieds have dropped off (around the world) there has been demand for CAD (and carry/risk in general), however, it is likely that a move higher in the USDCAD would be accompanied with a move higher in implieds, so being long vega is not the worst idea... Hence, with implieds this cheap, buying upside calls seems quite attractive.

A 3 month 1.065 call costs about 95 pips, with a KO at 1.04 about 87 pips (probably not worth the KO then)

Either way, I like Long USDCAD here

My next charts are to do with US yields, we still have the 10 year trading give or take at 2.5%, pretty much exactly where it was 365 days ago.

I still do think the US economy will recover well, and is seemingly lagging the UK's monster rebound by 6-9 months (if we forget that little -2.9% print on Q1 GDP) however there has yet to be a "shockingly" strong recovery, hence the US 10 year has gone sideways for nearly 4 months!

This next chart compares the CESI USD to the bp change in the US 10 year over a rolling 70 day period.

It is quite clear (to me at least) that we won't see higher yields without better US data, which is yet to come.

CESIUSD (white) vs. US 10 year 70 day change (red)
A major theme is that of rising inflation... which may be the shock story of H2 (shock maybe a strong word)

Next chart is that off USDJPY vs the US 10 year yield... closely tracking as per usual. Does suggest that if we do eventually see higher yields, that the USDJPY will follow suit higher

some other bonus charts just to finish this (sorry its long, been away for a looong time)

NZDUSD vs G10 3m IV (inverted)
Once again... We really aren't going to see the NZD drop until volatility picks up or carry drops... and given the current environment, neither seem too likely. For this reason, I am going to steer clear of the NZD, because frankly over the summer, with vol low... what reason is there for NZD to fall (milk?).

Sweden... SEK has been my favoured short ever since last December... it took its time, but is finally starting to drop a bit. Mostly because of that lingering deflation (no biggie tho) and we have seen a huge divergence in 1y1y fwd swaps, which as of the other day, the US rate is > than the SEK rate

USD vs SEK 1y1y and spread
This chart is striking, but I do not at all think USDSEK goes to 8... its just there may be some more pressure, especially if; 1) US rates rise, 2) Riksbank eases moar!

USDSEK vs US/SEK 5 year spread
A sizeable move, especially important is that the US 2 year rate is now > than the swedish 2 year rate for the 1st time in a while...but rates aren't everything.

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