It's been a while since my last blog post, and plenty has happened, I was fortunate to spend most of the summer (and that volatility) on the trading floor of a multi-strat hedge fund which was quite the experience, now I'm back at uni and now that I've settled back into things, I thought I could blog again.
Broadly, my views are quite light right now, no overly strong conviction ideas in any asset but still got some ideas to share. Firstly comes from the event risk we have this week - The FOMC meeting. Now no one is expecting a rate hike, and that's fair enough, whilst technically a "live" meeting its highly unlikely. What we should expect from this though is for them to confirm/kill the idea of a Dec hike. One issue that the Fed faced in September was financial volatility (be it the VIX/SPX or whatever), that is a clear obstacle that has passed us now with the SPX upwards of 2070, and as such these financial conditions are back to pre-summer levels.
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| SPX vs VIX |
This should at least, on the margin, result in a lean towards a rate hike in December, given all the fed has said towards the idea that they will raise the base rate this year there what little credibility remains at risk. Key numbers from the labour and growth markets remain clearly in favour of the hawks, yet it is still inflation that lags behind. The real hope lies with wage data, which as we've seen in the UK has started to finally pick up, AWE stands at 3% and looking strong with continued labour market strength. It is certainly likely that we could start to see a similar move in the US going forward, and with the constant discussion of the base effect of oil coming off, inflation upside is starting to be a real consideration.
Looking at a 2y zero-coupon inflation swap, we currently see 1.06%, which may be around what we realize, but going through year end I would prefer to pay inflation at these depressed levels.
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US 2 year inflation swaps
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So the game plan for FOMC, Personally I sit on the camp which expects to see a broadly more hawkish outlook. Hence I am looking to the front end rates markets to take advantage of this as the USD has had a sharp rally over the past few sessions and doesn't offer up the same risk:reward as in Rates.
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| Fed Funds Jan contract |
FFF6 is sitting near its highs, as the doves are in charge of the front end, 2 year rates are at year lows and the long end remains well and truly anchored to around 2%. This to me, seems like a cheap play on the Fed actually sticking to their word (even if we've seen them go back on it plently of times, and similarly with BoE).
Alternatively I would look to UK rates market to liven up post FOMC, with the short sterling curve as its flattest levels of the year, getting into steepeners here offers good levels as well as a strong play off any potential hawkish-ness that arises from the Fed.
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| Short sterling Curve Jun '16-17 |
At a mere 38bps, M6-M7 looks like a good spot to play any hikes, and with UK rate hike expectations pushed back so far (now out ot 14 months as per MS), but with the many positive signs from the labour markets and wages I think at the very least we are mis-priced as these levels and should be paying front end.
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| Average weekly earnings, at post crisis highs. |
On to the other Central bank talking on wednesday; the RBNZ. With the Base rate standing at 2.75% and the vast majority seeing no change at this meeting, I think we have a distinct chance of seeing a very dovish report. Mostly given the sharp (7%) uptick in the NZD this month, something that the RBNZ will be very much against. Whilst when charted it appears like a realtively small retracement from the larger decline, we've seen plenty of times (namely Aus) that even a mere uptick is not good enough and they'll look at the very least to talk it down.
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| NZD TWI |
As a short term position, a 25 delta put, 0.6650 (against spot ref of 68) for 1 week trades at about 70NZD pips, which on the surface seems quite expensive, so would be interested in selling some 70 strike calls against this to cheapen our downside as I see limited chance of the RBNZ doing anything to meaningfully leave the NZD higher. Obviously with the FOMC so close, one should look to a better cross, maybe AUDNZD, which in itself is looking rather cheap, at least against rate spreads, here I would look to longer dated (>3m) bullish option structures, such as 1.10 digi calls (which costs around 35% of notional, with a knock-out at 1.04 this cheapens to 25%)
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| audnzd VS 2 year spread |
In NZD rates, its more mixed, with 3m OIS sat at 2.6670, or approx in the middle between hike/no hike. However given the path of the NZD and RBNZ rhetoric I would expect to see a further cut towards 2.50 before year end. It still seems attractive to recieve NZD rates, albeit much less so now than before, though there is very little chance in my eyes that we see an even semi-hawkish RBNZ with the NZD sat here and data only "meh" at best.
Just a relatively short one to start with, hopefully i can get into the rhytm of a weekly piece again which should be fun, but these are just my thoughts on potentially hawkish fed / dovish RBNZ.
