Monday, 4 August 2014

4th August - RBA rhetoric et cetera

The most exciting week of the summer turned out to be not that exciting... US labour data came in a little light, but still strong. Strong enough for it to not affect the Fed decision making process in my opinion. However, it did successfully manage to crush volatility, and given the calendar for the next week, while there are occasional interesting points, overall it should be rather dull.

However, one of the more interesting releases will be the RBA (tomorrow (5th) morning). Rate movement are highly unlikely, and like the BoC the RBA is in a neutral stance where they see equal chance of the next move being a hike as well as a cut.

(N.B.Using OIS markets, there is around a 15% chance of a rate cut)

However, given the uptick in CPI I see no real chance of a rate cut, yet the RBA are still going to be trying to verbally intervening wrt the AUD.

AUD daily chart
The 0.95 area has been important for the RBA, as they've noticeably picked up their tone when the AUDUSD has traded here, and even though he are 0.9320, we are still close. So I'd fully expect the RBA to mention strongly the AUD. Especially since their neighbours (RBNZ) did so the other week, and the sell of there has been exactly what the RBA has been looking for.

AUD vs OIS rate (next meeting)
Australian data (and Chinese data) has been so-so and looking forward, neither look to be explosive or terrible, so I'm still part of the camp that thinks that the majority of the moves in AUDUSD are going to come from developments in the US rate markets.

AUD vs US 10s (inverted)
More specifically, the area with which the US 10 year note trades will be key... the intr-day correlation isn't huge, but with RBA policy in neutral and data their just chugging along, and sustained move higher in US 10 year yields through the latter half of this year should see the AUDUSD underperform and weaken back towards the 0.90 area.

Much like with the NZD, the AUD is incredibly sensitive to the levels of volatility, and without a meaningful uptick there, its hard to see AUD weakness frankly, as carry traders will look to the AUD and NZD.

AUD vs 3M implieds (inverted)
Overall, I am bearish the AUD going into the second half of the year across the board, as the AUD is more sensitive to the longer end of the yield curve than say the EUR or GBP, and so with rising 10s, the AUD should underperform. Regarding the RBA, there is no doubt they gonna bitch and moan, but the RBNZ had done so everytime, and only recently did the NZD listen. Maybe the same for the AUD.

Next onto a chart that was highlight from @gmactrading on twitter, which shows the EURUSD vs generic 2 year swap spread. Simple enough.

EUR vs 2 year spread
What is interesting about this, is how the relationship is not really "relative" as one would expect, but the actual level of the 2yr spread was key. It had traded at 0 +/- since "whatever it takes" yet the EURUSD continued to rise, as other factors (peripheral spreads, relative equity, current account growth) became more important.

But it is important to note, that now the rate spread has moved lower (currently 28bps wide) the EURUSDs correlation has picked up significantly. And while correlation =/= causation, given the move from 0 -> 28bps coincides with the ECB cutting, I think it is very significant and will be very key into year end.

However, shorter term, it may have over-run a little bit, especially as the DXY has run into resistance... So with the EURUSD market quite short, and running out of momentum - a short squeeze to 1.35 is on the cards for this week.

Finally, This chart I quickly made in Excel shows on the x-axis the Long/short positioning in the FX markets as a composite indicator of desk prop flows / risk reversals / IMM / real money flow etc etc

The Y-axis shows % deviation (overvalued vs undervalued) of the currencies against my own models (of which some can be found here)

My ideas would be to fade the extreme moves in the upper-right and lower-left quadrants. For example, a week ago, the GBP was trading 1.5% above my model and also had positioning value of 40 (where 50 is most extreme long and -50 is short). Shorting with a set-up like that is how I look to trade based upon this, likewise, short term, the EUR is "undervalued" and also the market is short, so there is potential for a short squeeze higher and hence I would buy. However, I need to do some more work on this idea, just thought I'd share what I've got so far (which admittedly is not much).

Not much else going on, expect 10 days 'til judgement day. fuck.

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