On the USD and US rates

Last week we saw quite an incredible move in US rates, it is quite difficult to describe henceI'll let a chart tell the story...

US 10 year yield

We saw a huge move, probably the largest (once adjusted for yield) ever. Nearly everyone I've spoken to since the move last Wednesday that sits on the sell-side said their rates desk got absolutely slaughtered. Especially given the exposures that rates desks can take on, a 3% move in a currency is big... but a 3% move in the price of the US 10 year note is massive - and it hurt a lot of people.

The craziest thing is, that we ended the week only marginally lower from where we opened.

USD 1y1y

The forwards and especially the short end got hit lower and have stayed down, 1y1y has dropped by over 50bps and the expectations of rate hikes from the Fed have been really pushed back... Using Eurodollar futures we can see that the market had pretty much agreed on July 2015. However, one day the market in its infinite wisdom just decided to push that back to November!

CS 1st hike date

However it wasn't just US rates that went a bit crazy, we saw a large move in Peripheral rates too! Italian 2y's also had a busy day on Thursday with yields doubling in a few minutes!

However this does present us with some trade ideas, firstly and simply with the USD. The big event next week is clearly the FOMC statement where we will finally see Yellen's actions. The move in rates must have something to do with how people are perceiving Yellen, however it is still very likely that the QE program will finish, but any discussion about "considerable time" are out of the question it seems.

Currently, it seems after the recent rates move the EURUSD is trading fairly cheap to 2 year spreads, and its perfectly feesible to see a pickup towards 1.300 in the coming weeks.

We've still got extreme positioning, and the USD does seem overextended still (even at 1.28) as I was quoted saying here (http://blogs.reuters.com/global-markets-forum/2014/10/08/fx-musings/)

We were trading around 1.26 then, and I stick with my price target towards 1.30.

One way the Fed could push back expectations is by lowering NAIRU forecasts, possibly to below 5% to buy some time for Yellen to push back rate hikes. This will of course weaken the USD, but I think the bigger question is the disinflation we've seen in 2014 (particularly last few months in 5y5y inflation swaps) a problem for monetary policy? 

I mean, there may be demand issues but given the move in inflation is global and we've seen a large drop in oil/commodity prices, its clear to me that oil prices are in fact impacting monetary policy, or at least market expectations of policy.

This scatter from @boes and @ericbeebo is particularly interesting as it does show the strong relationship between the two.

And assuming that Yellen leans on the dovish side, its a conveniently timed excuse to be even more dovish!

As such I think that Cable offers decent upside along with EURUSD. As we can see from the chart, the 1y1y spread is still important for the pair and this will most certainly continue going forward, but assuming we see some further short term weakness in US yields from a dovish yellen then the USD will weaken and the GBP is already marginally cheap (and heavily shorted).

All in all, we've seen a monster move in rates, and a complete shift in sentiment regarding 2015 and the Fed, however from what I see, its only a transitory thing due to oil/commodity price declines and as such I once again am looking to pay rates, short Eurodollars and buy the USD - just at better prices.

*sorry its a short and quick one with very little detail but I crammed it in (got to study... or something). I will try to write some more / better posts in the future

22nd Sept

It's been hard not to notice the flurry of new EURUSD targets from the sell-side, notably last week with Goldman Sachs targetting an eventual parity (chart). More recently, Citi suggesting the ECB itself is looking for the EUR to drop to the 2012 lows.

We suspect that the ECB is targeting a reversal of the EUR rally that started after the EURUSD hit a multiyear low of 1.2043 in June '12 - Citi

I can begin to see where they are coming from, very simply, if we regress short end rate differentials to the EUR, based on the last few years inter-relationship, then we can somewhat forecast going forward based upon the enormous divergence in monetary policy that will likely play out over the coming years. Of course, the relationship will come and go, US rates won't rise in a straight line and who knows if we ever get that 1st FF hike next year. But either way, its rather clear that, at least from an interest rate perspective, the EURUSD is very susceptible to fall in the coming years.

Using a simple 2y rate model, we can forecast a 1.07 EURUSD for 2 years time, using the spread between 2y2y fwd starting swaps. But like I said, its not going to happen as cleanly as that, but the magnitude of downside isn't *that* ridiculous.

However, I care much more about where the EUR is going in the next few months, not years. So lets look at that.

CESI spread vs 70-day change in EURUSD

 Here we have a chart of the spread between Euro-area and US Surprise indicies, plotted against the 70-day change in EURUSD. The EUR is clearly stretched at current levels, and it would seem that the data flow is starting to edge against further downside.

EUR vs model FV

 And as we can see from this chart, The EURUSD is at extreme "cheap" levels against my FV model, with a sizeable divergence between the two recently. However, as is the case with models, it may stay diverged for a long period of time or the relationship that we've seen over the past few years may dissipate etc. But, it is worthy of note to me.

I still see Sovereign QE as a likely inevitability from the ECB, but not for a while, so until year end I expect little from them. From the fed, the prior FOMC was quite interesting. A hawkish shift in median dots, yet Yellen clearly stated that the Futures market aren't out of line with the dots. Given that they are massively out, we can only draw from that the location of Yellen's projections in the 2016 and 2017 periods (I circled them)

So while we will get a lift-off in rates, It's kinda pointless to look at the "trimmed mean" or median or whatever. Just focus on Yellen's.

2yr futures net positioning (CFTC)

Investors, have flipped to the most short in years for the 2 year futures, so much like with EDs we have an obstacle in our way.

Lastly on the EURUSD, looking at DXY bigger picture.

Trading up against resistance, now is a critical juncture for the USD, and while longer term the picture is clearly bullish, we've had 10 weeks of  advance and no meaningful pullback. A good reason for this really, with this move taking most by surprise, investors are jumping in at even a 50 point pullback so as not to miss the move. In EURUSD, huge selling interest on anything above 1.30, so if we do bounce. It won't be for too long.


On to a little look at some precious metals, we've seen quite a sharp move higher in 5 year real rates. Many expected 0 to at least slow us down, yet we're already 12bps past that now. The outlook for higher real rates also makes sense somewhat, so while we may pullback, it might be shallow.

The relationship with Gold and Silver is very well documented, and well known, and we can see so far this year, the two track each other nicely.

US 5y real rate (inverted) vs Gold

The outlook also doesn't particularly look that pretty in Gold (or silver)

To me, being long XAU vol here seems to make sense. If we break lower than 1200 we're certainly going to trigger a lot of stops on our way down to 1050, if we reverse, investors that have chased this lower against the 1200 level could quickly cover. Hence a 3 month straddle seems pretty attractive to me.

Otherwise, last post for a while (I assume). Moving into uni next week so quiet from me.

16th Sept - FOMC & Scotland

It seems like all of a sudden the discussion around the FOMC (this wednesday) is around the language use, notably the "considerable time" comment, which as Hatzius (GS) points out, is almost an informal 6-month marker from the end of stimulus until the first rate hike, which would point to sometime around March/April '15.

Market estimates see the first hike (taken from fed funds futures) to be between June and Sept... basically, next summer.

Talk about whether we see "considerable time" removed or not is unnecessary at this point, I think what is more important for the fed is to anchor expectations in a more quantitative way i.e. the dots... Currently, the market is behind the last fed dots, and while we could see an "RBNZ" esque move to lower forecasts to current market expectations, I expect no meaningful change (at least in the front end immediate forecasts, we may get some moves further out).

On the other hand, data has been promising, and an argument can be made for June or earlier hikes

By most accounts, the fed is already more dovish than needed (as per taylor rule in 1st chart) and when looking at recent activity indicators from GS, we can see quite an improvement over prior meetings. So we may see upside surprises to the dots.

On the market side, we've seen quite the run up in yields MTD, so in the event of a boring, unchanged fed then Yield curve flatteners may be attractive. Otherwise, I remain short EDZ6 from 98, as even though positioning may be against me, there is significant mis-pricing against the current dots, and any upward moves to rate forecasts from the FOMC would benefit that trade enormously.

US 10's stalling at the top end of this years down trend

A break higher on the back of a marginally hawkish fed would be important as the spill-over effects into G10-carry, EMFX and even credit markets would be significant in the short term.

AUD vs 7 year UST (inverted)

Won't dwell on this too much as we all know the impacts, but here we can see High yield vs 1Yx10Y normalized swaption vol, which will likely rise alongside G10, and especially going into a hiking cycle.

HY vs US 10 year swaption vol

The sell-off in commodities, particularly energy (as its direct impact into CPI) has seen US inflation swap pare their advance, and we've dropped 40bps on the 2 year inflation swap. This has boosted US real yields, which at the same time have been rising strongly. So right now, the strengthening USD has pushed the CRB index lower, which has led to higher real yields and so on etc.

CRB index (red) vs US inflation swaps (2y)

As noted last week, and reiterated today. I am positioned long EURUSD in a zero-cost structure between 1.27 and 1.30 or so. However, short USD works well as a hedge against my rates trades, especially with the extreme moves in the USD currently.

Off course, on to the Scottish independence vote, which the results will drop early Friday morning. Currently based on bookies odds, there is around a 20% chance of a yes majority.

*from Betfair's exchange

This is a relatively low percentage in my books (okay, not compared to a few months ago, but thats not the point. No is still far and away likely).

All over twitter in the past few weeks we've seen plenty of GBP implied vol charts, and we all know its spiked fantastically, with Sep-19th ATMs trading at (mid) 18 vol points on cable.

One thing not overly explored is that of the move in the short dated risk reversals, or even the impact on the curve a long way out.

Looking first at one week 25 delta risk reversals, we can see that it is the most extreme ever (on my data, which doesn't go back to 2008) - at -4.2 vol points!! (EDIT, asked around. Lowest 1 week in 2008 was -3.7, so... yeah more extreme than then)

GBP 25 delta 1 week risk reversals

I can't chart the risk reversal skew for Sep-19th, but as of writing its currently -5.5, So its safe to say that at least in the options market, there is a helluva lot of protection buying going in to Thursday Evening.

The thing is, given my expectations of the vote, I am still not brave enough to sell naked puts (for sep-19th) even if we have an all time high RR skew and a level of implied volatility that won't likely be delivered on the day.

GBP 3 month 25D risk reversal skew

However, I look further out the curve for GBP options (3month charted) and its 2sd wider than its mean, and back to 2011 levels.

So I definitely think, that further out in the curve there are extremes that should be exploited. Maybe not 3 month exactly, merely using that to illustrate how the entire term structure (not just very front end vols) has moved. As per last week, I still like EURGBP double no-touches, a 25delta 3month DNT costs just shy of 20% of notional with barriers at 0.8221 and 0.7786. Last weeks strucuture is doing ok, but spreads are going very wide (up to 3 or 4 vol points) so MTM is not doing as well as I think it will by expiration.

I have done some math & modelling, and I think 1.57 is fair value for cable in the event of a "yes" vote, where as 1.6450 is where I think we trade after "no" (however cable is very much dependent on FOMC, so EURGBP is cleaner to look at for the "GBP". 0.8265 is my EURGBP FV on yes.

Either way, should be a fun friday, but I think "no"

G10 overview - Sept 9th

A quick look at some G10 currencies, and some of my thoughts on them, especially as we have started to see the markets liven up a little bit, broadly speaking, Central bank divergences is still the main factor, but we've got plenty more noise around now.

Some generic charts to start with, firstly, 1y1y swap rates for UK, USA and Europe. These (and their inter-relationship) do pretty well to sum up where the FX markets have gone in the past few weeks/months and why.

USD, GBP and EUR 1y1y swaps

Next up, is G10 vol, which will be touched on throughout, but generally speaking we can see how it has bottomed and finally heading higher with some decent traction.

G10 1 month implied volatility composite

Anyway, on to the EUR, which has been very very weak whilst I was away on my travels. ECB cutting rates and looking to boost the balance sheet some €1tn a very good reason for the weakness we've seen, but it seems to a large extent that now the ECB can do little else to weaken the EUR more (which is what they've been doing since 1.40 anyway). As such we need to maintain positive US economic momentum for any further EURUSD weakness.

However, Positioning is now a huge hurdle in the way of sustained weakness... possibly the only realistic one as well. Whether you look at IMM or proprietary data, everyone is balls-deep short the EUR and looking at the charts, the market seems very extended.

A quick look at EURUSD 28 day (1m) RSI shows its at its lowest level since... well before the EUR existed.

EUR RSI extreme

However, its low for a very good reason, and versus my models, there is little in it between fair value and the current spot rate. With diverging rates its no surprise to see this pressure on the EURUSD.

EURUSD vs fair value model

This being said, rates are still likely to continue diverging, the Eurozone economy continues to lag behind the US by a substantial amount and real money flows are strongly biased towards the USD, so while a bounce is likely, expect it to be relatively short lived. We will probably trade the topside of 1.30 again soon, however we may be in for a period of range trading as the market clears out all of the shorts before the fundamentals take over and we head lower again.

My trade (which I don't think that you should follow) is Long 1.3050 2m call, short 1.27 2m put. If we go sideways (as I mostly expect) we are pretty much zero cost. Downside is going to get harder with positioning and techs in the way so we hopefully won't see 1.27 go. On the other hand, if we do see shocks to the current status quo (where-ever they may come from) we may see a short cover rally which we would benefit from.

On to the GBP... one poll suggesting "yes" to be the outcome of the Scottish independence vote on the 18th has certainly stirred up the markets. GBP has *plummeted* (kinda) implied vols have gone nuts and the skew has slammed lower as investors are desperate to buy downside protection, or else they going to look like fools if "yes".

As such, we can see that the premium on GBP 1 month options has risen to a high not seen since the 2010 general election.

GBP - G10 1 month vols

But its not just the very front end (which has inverted out to 4 years), but even 3 month risk reversals have slammed wider, with investors paying a hefty premium for downside strikes

GBP 3 month 25D risk reversal

looking to trade on the back of this might be a good idea, especially on the longer dated tenors, which will more than likely see the referendum effect pass, so downside puts (deep OTM) be pretty attractive to sell... however I would rather wait a few more days for the "yes" hype to build.

As personally I don't see "yes" happening, nor the impact being *huge*... numbers like -5% or -10% are thrown about on the sell-side, but no-one really knows. Uncertainty and the likely push-back from the BoE are sure to weaken the GBP, and right now it still feels like a mass exodus from hefty GBP longs rather than pure speculative shorts, hence, while downside is likely it might not be massive. but a sub 1.60 handle will occur on yes.

On the other hand, there may not be that much upside to a "no" vote. Much of the downside move can be explained from UK rates dropping and "no" doesn't do much to change that.

GBP vs M5 STIR spread

Maybe another way to look at this is the EURGBP, because really, the GBP hasn't been that weak... the USD has just been really strong.

The EURGBP has weakened to levels from two weeks ago... wow.

EURGBP daily

Currently ATM options expiring the 19th trade at 11.5/13.1 vol, with spot at 0.80 (give or take) we have a few options, ideally positioned short vol and also short GBP. As such 0.8150/0.79 sep 19th double no touches currently priced at ~25% of notional.

As such this offers decent risk:reward for the referendum to be a relative non-event, and at the same time see little upside potential for the GBP. Gotta watch that gamma tho.

On to NZD and AUD

The AUD has been performing well, with positioning currently standing at multi-year highs and staying surprisingly robust against the recent DXY rally

from BNPP

The AUD however is vulnerable to a pick up in US rates still, however it seems more sensitive to the longer end of the curve, and need to see US 10's to meaningfully pick up in order to see any sustained weakness from the AUDUSD.

However its neighbour, the NZD, is much more vulnerable in my opinion (not that I'd short here)

With one of the largest net external liability positions, New zealand is at risk from higher funding costs. While that is a way away still, we start to see short end rates pick up as we get closer to this fabled Fed Hike. On the other hand, moving into a hiking cycle should lead to structurally higher levels of volatility, as such carry/vol from NZD should retreat somewhat weighing on the NZD more so.

We can plainly see the importance of g10 vol on the NZD from this daily chart

NZD vs 1 month vol (inv)

So longer out, NZD is tres tres vulnerable, but shorter term it suffers from the same problems that EUR bears face... that positioning is rather short. However selling rallies is definitely something I like. 

With AUD, I think patience is the key.

I've looked at 1/2 of the G10, but thats probably enough as this is getting quite long now... To finish, just some bonus charts that I've got my eye on.

US 2s5s10s

5's looking cheapish here... and work well as hedge against selling EDs. However I don't particularly want to be long 5s into year end by themselves. would rather play the curve, so maybe 5s10s at 75bps

But considering this chart of CESIUSD vs chg in US 10s, I'm starting to think once again that bonds are a tad expensive here

cesiusd vs 70day change in US  10s

US 10 years

Here we have US 10s and QE highlighted... now just a thought regarding Core/peripheral Eurozone rates... do they start to rise on the back of the ECB starting to do something?!?

In other news, off to uni in 3 weeks, unsure as of yet how that affects my twitter/blog flow.

week of the 11th August - BoE/UK economy and the GBP.

A year ago, at the August inflation report, the BoE effectively enacted forward guidance, the GBP had an incredibly choppy session trading from 1.52 to 1.55 in the space of a few hours. I recall it well, as I'd just got back from holiday and was playing Dead Island 2 on one screen, while having twitter and my terminal open on the others. I was glad to stay out of the markets that day as I was getting myself re-acquainted with the markets. This week, we have the BoE once again, and it provides Carney with a perfect opportunity to provide a little more certainty with regard to the 1st rate hike... which is now seen by many in 2014. Renewed CPI projections could be a big mover for the market - a shift higher in the baseline estimate would most certainly bring forward expectations to November time.

UK CPI -Next release for CPI is Aug 19th, however the projections are likely going to be more important.

However, I sit on the camp that sees a 2015 rate hike, one of the key indicators which the BoE have been telling us to watch is Average earnings growth, which they expected to rise to 2.5% by year end (GLWT). Given its persistent weakness, I think the BoE are going to be extremely cautious during the hiking cycle, and will try and put it off as long as possible.

The UK labour market has been incredibly strong, with consistent -30k prints on the claimant count, and the headline rate of unemployment dropping far faster than anyone expected... So we /should/ see a pick-up in wage inflation as we get closer and closer to the NAIRU.

Looking to the markets now, it's clear that the GBP is trading rather weak going into the BoE, presumably with the growing fear that they may confirm (by means of forecasts and language use) a spring 2015 rate hike... With the recent GBP drop, we've also seen STIRs (specifically Short sterling Z4s) rise back into their 2014 range.

Dec '14 Short sterling

For the meantime, the GBP is trading incredibly closely to relative interest rates, most notably the implied yield spread from M5 STIR contracts (Short sterling - Eurodollar)

GBP vs M5 spread

This does make a lot sense too, both central banks are not too far away from hiking cycles, and both economies look to be performing well in my opinion, as such the smallest changes in rate path expectations affect the GBP. Essentially, the US hiking cycle is supposedly to start later but is going to be a tad more aggressive (using 5y5y rates as a rough proxy for terminal rates, we can see US rates are 50+bps higher than UK ones)

UK 5y5y (white) US 5y5y (red)

However, it seems that the GBP is far more sensitive to what is happening on the (very) short end, so essentially for the time being, the GBPUSD is a rather simple bet on the distance between 1st hikes. Which puts the current cable rate equivalent to a 6 month gap... it was closer to 9 months when we traded at 1.72, but we've seen short sterlings weaken, and US rates move higher so we've dropped back to 6 months.

GBPUSD rolling quarterly change vs CESI spread

Also, data has turned against the cable in the past few months, and this will be a defining factor in determining that time gap between hikes, and thus the Cable itself

Morgan Stanley's M1KE (month to the 1st hike) recently went under 12 months for the US... reinforcing the Summer '15 view that many have (tho this will be very data dependent, especially if wage inflation ticks up in the US). However, this all seems pretty fair to me, so right now the GBP is in a wait and see mode regarding the BoE, until then cable will mostly be a USD story.

A trade idea from a few weeks ago was selling GBP vs EUR (about 1/2 way down here)

However, given that I'm winding up my positions for my summer holiday, I've decided to very closely watch the EURGBP next week and look to cover around where we are (preferably 0.8020) 

EURGBP model

Still trading a little cheap to my model, but its close enough now to not mean much, hence my willingness to take profits here.

The EUR should be interesting next week too, in my opinion. We saw a hint of what maybe to come on Friday, with a sizeable short covering rally taking us back above 1.34. However I still think there is scope for a move back closer to 1.35 (which would be ideal to load up with Long term shorts)

Model (white) vs EURUSD (red) and the spread

So we could see a bit of short covering, which would also serve to help the EURGBP pre-BoE, which is what I'm looking for so that I can exit that trade.

For the EUR, we also have German GDP... but something is telling me that I won't give a toss about it (as its Thursday) - however a negative print, which is slowly starting to be expected really does throw a spanner in the works of this eurozone recovery...

We have seen the DAX trim a good thousand points or so since they won the World cup, but finally looks "cheapish" relative to basic valuation methods, but also against US equity. Even though we have seen a pick up in risk (as per my controversial posting of RU CDS' vs. DAX) European assets are looking like good value, especially on the periphery. If the markets really are in some short term risk on/risk off mode, then ceterus paribus, we should see some demand for EUR equity into the beginning of next week especially after the rebound in US equity on Friday, Also given that (on technical metrics) we are oversold and trade at better values this could also serve well to boost the EUR.

relative EU/US equity vs EURUSD

Also, on this "risk off" move in the markets last week... the EURCHF traded down to 1.2130, while 1M vols spiked higher (ok, ok, they are still crazy low, but its quite a move)

EURCHF 1 month ATM vol

Using this spike in vol and lower spot price, I sold 1.2125 puts for expiration at year end... merely 45 points tho.

EMFX was well supported on Friday, and likely to be supported even more if we see the DXY topple over and head to 81. We saw relative implieds volatility spike higher in EM land, but hardly anywhere to be concerned, trading at an average 3.3 vol points higher than a G10 composite on 1month tenors (however mean is 2.5, so only really 0.8vols) I opted on Friday morning to sell some topside USDRUB and USDTRY 25D calls (2.25 on $TRY) 1 month expiration, as we saw quite the spike higher in risk reversals (from 0.5 to almost 2.5 on 1m 25D for USDTRY)

USDTRY 25 delta 1 month risk reversal

However, given the attractiveness to fund EM carry (and DM to some extent) with EURs recently, an EM rally could serve to weigh on the EURUSD, however I don't expect it to be a hugely significant factor.

In other news -- *BREAKING: JEREMYWS' Aaa RATING PLACED ON REVIEW FOR DOWNGRADE AT EDEXCEL

Rumours are strong that we'll see a downgrade to Baa1 on Thursday... but We'll see. 

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.