17th May 2015 - FX/Rates thoughts

So I'm about to enter my exam season, which will pretty much keep me pre-occupied for the next 3 weeks - its crazy how quickly this year has gone, regular readers and friends on twitter can surely remember me panicking about my A-Levels last year, and some even as far back as GCSEs I'm sure.

But I just want to write a shorter piece for whilst at exams. Generally speaking, and maybe its because i'm arguably more focused on exams, I'm struggling more bigger thematic/directional ideas in the FX and Rates markets. However this maybe the dynamic we are in until the elusive rate hike.. which is now priced for Dec/Jan, and as such the markets are just in a "wait-and-see" mode. Either way, I'm not completely out of thoughts, just not as many as normal. The first thing to look at is obviously the EUR and bunds etc. Because they are still very much in the forefront of everyone's thinking.

EUR/USD vs US-EUR 10 year swap

10 year swap spread has tightened to 130bps, down from the 160bps a while back.

If you remember back a while, I positioned for a tighter spread, but now I think we've come in enough for that view to have diminished in the short run. I still think EUR long end rates should be higher, but I'm of course wary of the large QE flows etc.

Normally, the EURUSD rate is not too sensitive to the longer end spreads, but it seems clear from this overlay that it has been. Much the same reason i'm sure as to why the EUR is well correlated to the DAX for example. A lot of flows, both real money and CTA flow has been "hedged". Well this isn't new to anyone, we've all been talking about it for months, but it just still seems to be around, not sure for how long though, would expect this to diminish as markets settle down... (I'm not one for correlation trading lol, but would expect lower correlations going forward, and it intuitively makes sense)

EURUSD vs DAX inverted

Looking ahead however, I am still constructive on European equity, the conditions are still rather strong, and of course we have this minor greek issue in our way, and maybe the tail risk is somewhat under-priced (as it always is) but I'm not expecting doomsday there. So at least in this market we can potentially build some ideas.

DAX vs 2 year EUR real rates, a bit iffy, but its a supportive factor, that and euroarea growth accelerating this year and QE etc etc

Looking at ATM implieds in DAX and SPX, we can see the premium in VDAX is crazy high.

Infact so high  we gotta zoom out the chart into the monthlies before we find a time when Dax vols were 80% higher than SPX

The skew is equally interesting, if you follow me on twitter, you would have seen my long SPX risk reversal trade, which is doing nicely, but I think that DAX is probably even more interesting. selling downside in the DAX is obviously risky, but probably worth it. I mean those of you that know me, know I'm a bit of a theta whore, but this does seem like good value especially going into the summer doldrums.

Furthermore, we see that Bund futures, have set-up, at least from a tech perspective, a bit of a base.

Potentially we could see a pop in RX which would likely be construed as EUR bearish assuming USTs are like meh.

Combining these, I can't help but end up with a shorter term EURUSD bearish bias. And this is strange coming from me, as I've been calling for it to pick up every since we dropped around 1.08 (just see older blog posts).. but we trade now, just shy of 1.14 and we may getting a bit ahead of ourselves, and if the lazy correlations remain then a move back towards 1.10 is on the cards for now.

In other FX markets, We've had time for the GBP to settle down, if you read back to my election piece here you'll see that I bought a zero-cost GBPUSD risk reversal, we currently sit ~800 points higher then when I recommended that and I've now covered.

GBP vs STIR rates

We were ultimately taking a view that the election risk premium was too much (inferred fom the divergence from rate spreads), and now that risk is passed we've joined back up together and the outlook for cable is pretty clear... its all about relative monetary policy, as it always has been, and not some pointless election (pietro ;) )

So that trade has done well, I have leaned on the more hawkish side in both the US and UK for some time, still expecting a 2015 hike, and the BoE to be not too far behind at all, but right now I don't see anything particularly interesting in GBP rates, I mean I'll probably moan about the proxy (5y5y) terminal rate being too low (especially vis a vis USD rates) as I have done on twitter many times in the past, but ultimately its not huge, and its probably the macro economic textbooks telling me this and not what the current economy is saying.

Silver

 In other markets, Silver continues to push higher, after breaking out of this range, my long straddle idea is working well with Silver moving quite a bit quite quickly. Needs to clear 18.25 really.

Looking into possible long Silver vol trade.. spot in a tight range, and implieds cheap to FX composite. pic.twitter.com/htUcLhtFoM

— Jere Wilkinson-Smith (@JeremyWS) May 11, 2015

USDJPY is similarly a one which we should look to position long vol in... but as I said, the summer markets may be slow so we don't want to burn premium on this just yet. 

However that being said, because realized is so low, the USDJPY implied discount to the overall FX market is quite large, so premiums are cheap-ish, but still I think I'll wait till after exams

And broader Vol themes, especially in the rates market (3m5y) is heading lower, even after some larger moves in the FI space recently, and FX vols will likely track lower into the summer, assuming we don't have that June Hike, which is very very unlikely.

FX vs rates vol

The move we have seen in rates is clearly a mix between a few factors, higher inflation expectations I'm sure plays its part as I have looked at many times before, but we can't forget term premium which has moved higher, likely pushing nominal yields with them, and ya know at the same time burning a few CTAs fingers.

10Y ACM  term premium

Yup so that's pretty much it from me.. no shocking ideas or themes, which I'm glad about, hopefully I won't miss much whilst on exams :) 

May FX & Rates thoughts

Gotta start with the big events of the past few weeks... the large repricing in the European rates space.

Looking at RX1, or the 10Y bund future we've seen a massive sell-off. No matter how we look at it really, its a big and important move. However I think its key to note that this has mostly been a parallel shift up in EGB rates, as in, looking at peripheral spreads (Italian-German for ex) are still near cycle lows, and in fact they were a little tighter on the week.

RX1 daily chart

RX1 tick chart

Thursday saw some crazy vol in Bunds, which may be seen as capitulation. Flow talk suggests this is mostly CTA/speculator led (as per someone i know at JPM) where as the real money flow still underpins the fixed income markets. However this episode, like the Flash crash in UST yields last october just goes to show vulnerabilities in the market.

As I know everyone loves, we can try and fit a narrative to this move... of course whatever we say won't capture the whole picture, but we can try and justify it somewhat.

 First off is of course the stops/liquidity idea, which is often the sales reps "go to" excuse for any inexplicable move.. but of course, this does play a part. The market was noticeably thin, and even in my size I was struggling to get good fills in the Bund option space...

Secondly, and a theme that I've talked about as recently as beginning of April here where I looked at inflation swaps are questioned the likelihood that the long end of European rates could stay low... or my march piece where I looked at a comparison to Japan and thought it was getting ridiculous here

The common theme I talked about in those, was the idea that even if overall the Eurozone economy was rather weak, the rate of change in data and direction is certainly picking up... and this was seen in leading indicators, CESIEUR and inflation swaps.

I did question a few blogs ago why nominals hadn't responded clearly to a sharp rebound in inflation expectations.

EZ ZC 2y inflation vs German 10 year

But of course, one of the goals of ECB is to lower EUR real rates, and for sure this works, definitely on the short end of the curve. But further out, you have to wonder whether the impacts are truly market related or will they become realized? doubtful tbh.

The only issue I have with this is that this wasn't exactly "new" last week... inflation swaps had been shooting higher since Jan, but its the most logical reason for higher EUR rates, just not describing the catalyst behind it. Of course we'll never know, and as an update, my short bund / long UST trade from prior blog here is still open and doing fine. Entered at 161bps (i know right, nailed the high!) and currently sat at 139bps.

EUR/US 10 year swap spread

Looking forward however, whilst I am getting a flurry of sell-side ideas on Bunds et al. I think I am going to steer a little clear of it for a while, looking in the options space, there has been a significant (if understandable) pick up in implied vols

RX ATM vols

ATM vols traded as high as 11, but now done to 6 or so.. but still commanding quite the premium over the average. Obviously there is quite a skew in the vol, with puts quite a chunk higher than calls, but even still with the kind of moves we've seen I don't particularly want to be selling OTM puts. However what maybe some of the specialists might want to look into is that the skew in UST futures is far more slight, and going on the idea that long end rates are reasonably anchored within each other then there may be some hedged plays taking advantage of the differing implieds... however I'm too lazy to think about that too much and already in a tightener so got enough exposure for now.

Final chart on this whole thing, is the EUR M1KE from MS..

down to 30 months, from 55 months, just a few weeks ago... now I would probably look to fade this move in euribor futures.

Okay I lied, one last chart on this, ERA curve vs a few weeks ago. Its steepened a bit, and shifted higher, but lets be real, yes I think that the Eurozone economy is doing better than most out there, but no I don't think we see hikes for a long time. The Taper talk may come and go, but I suspect we follow a similar path to the US, where we have to wait a very extended period after the end of QE before hikes come into play.

And oh well, lets have a bonus chart :)

US 2s10s vs Bund 2s10s analog

In terms of monetary policy, the ECB is a good many years behind the Fed, in terms of an implemented open-ended QE program etc, and sitting on the supposed lower bound. To me, its entirely possible we see a similar path in EUR rates, as we saw in US rates over the past few years. First we see steepening, which maybe just starting, as growth and momentum pickup, all is good, yay! but the realization that hikes are way off means that any EUR rate taper tantrum will be short lived and eventually we start to see flattening as a few years later the short end looks to pick up. Now of course, this is very, very, very iffy, but plausible imho. Hence why I am still positioned for higher EUR rates. Nevertheless, anymore illiquidity in the long end will undoubtedly push ERZ8 (the one I watch) around, and last week it was tick-for-tick the 10Y bund, so that could be the best place to trade the overriding macro theme of no hikes. 

Okok onto something else. Can't obviously cover everything, but in my last piece here I put forward what is apparently a somewhat controversial idea, on the possibility of RBNZ rate cuts, and when we last looked at the NZD we traded new all time highs (Trade weighted) and I suggested the RBNZ would be less than happy.. and they were. since then, the TWI is down ~4%

Very good for my EURNZD longs from last week ;) up 10 big figures, but covered it now - tho still like the idea. Since last time, there has been growing talk of a rate cut, with some local banks predicting a 25bps cut this year! so maybe my call won't be soo outlandish. Afterall I got the hike cycle right, calling for a much a lower terminal rate vs the almost 5% that was expected :)

I bought a USDCHF 0.97 digi call the other day (spot ref 0.91) for 23%, idea based on a hedge against my overall book which is generally short USD, or has been, and takes advantage of a potentially dovish/supportive SNB and cheap cheap price. a 4:1 risk reward ratio for USDCHF  trading where it was just a few weeks ago, in 9 months. Yes please.

Was spot ref at 0.91, bought at 23% cos ma spreads are a bitch... but here's is the trade from OVML pic.twitter.com/gW5ysW213C

— Jere Wilkinson-Smith (@JeremyWS) May 7, 2015

Ok, one last segment I promise, I've been looking into EMFX a bit these past few days, not that I really trade them, but I was asked on building a carry portfolio, specifically in EM. 

AUD vs JPM EMFX index

It is no shock to anyone, that the AUD trades like EMFX, it has done so for a long time. However what I didn't really realize, is that versus the JPM EMFX basket, the beta is very close to 1. As in, Long EMFX/short AUDUSD would in spot terms be rather flat over the past few years, but up a ton in carry. 

EMFX yield

Here is a somewhat crude and crappy CIX of the yield on that EMFX index. (I don't know currency weightings, so assumed they were all the same lol), but its around 6%. Now if we adjust this yield for paying AUD swaps then.

EMFX carry funded in AUD

Now of course, I'm not specifically looking to buy all EM just versus AUD. I do of course have my biases for funding ccys, such as CHF as well. And at the same time, there are some relative basket cases in EM, such as possible pressures on TRY and ZAR, but generally speaking I'd much rather fund in AUD right now, as it should alleviate risks from a stronger USD (directly ofc, obvs there are indirect impacts on EM from this, due to USD liabilities esp in TUR etc)

On a carry/vol basis, it also looks good. Using the simple AUD funded carry, we see carry/vol sat near its highs. 

All I'm saying is that I don't think its the worst time to be overweight EMFX, just look to fund it in AUD and CHF, and be selective in EM by being underweight Turkey/SA etc. 

FX & Rates thoughts - April 22nd

Markets are all very interesting right now, we are living in interesting times and there is a lot that we could look at. However, I am going to focus mainly on the UK election, the GBP and related assets. Although there are certainly some ideas that we are going to look at in EUR rates markets and ultimately the EUR fx rate.

Firstly, the UK election is now just 2 weeks away and its all starting to get very exciting... or maybe not, I'm not too bothered.. I am finally old enough to vote, however I don't have the best political knowledge and while I have a rough idea on how the election is going to play out, there are plenty of uncertain outcomes that are entirely possible.

We have already seen the markets react to varying polls, just like with the Scottish referendum. After one poll from the Guardian suggesting the Tories had taken a bit of lead we saw an immediate bid in the GBP. This acted as a good sign to me as to where we stand going into May 7th... However currently the bookies (paddy power) favourite is a for Labour Minority. All this uncertainty is what has led to heightened implied volatility in the GBP relative to other currencies as shown below.

GBP-FX composite 1-month implied vol

We can see 3 distinct peaks in this chart.. 2010, Sept 2014 and right now, and these all coincide with election risks, and just like before this heightened risk premium will most certainly fade in a few days after the election.

GBP riskies vs basket

However conversely to ATM implieds, the skew is much tighter than the prior two spikes (on a basket weighted basis, i.e. not just GBPUSD riskies).

So far this year, the GBP has performed well, so long as we don't fund it in USDs or CHF. One of my trades of the year for 2015, was buying a basket against varying currencies and as we can see below that it is up around 10% against 3 of the funding currencies and down 5% against the CHF, so as an update it is all going rather well.

GBP vs CHF/SEK/EUR/AUD

Looking forward, I think we do have a sizeable chunk of election risk premium priced into the GBP, I would argue a good few percent. I think the market learnt its lesson from the Scottish vote and more efficiently priced in the risk.

GBP vs Z5 STIR spread

Short term interest rate spreads have diverged meaningfully from Spot FX in the past few weeks. Here we chart L Z5 - ED Z5, or Dec 2015 LIBOR futures. This simple overlay would suggest the GBP is around 1.55 and of course its a huge simplification however its clear hedging election risks is most straightforward in FX and this is represented above.

Whilst there is uncertainty in this election, and I don't think anyone would disagree with this, its hardly as if there wasn't in 2010. The 1st time we had a coalition must've come at a shock to many, and rightly so the GBP was vulnerable, however only for a day or two.

GBPUSD May 2010 and DXY

TWI GBP May 2010

What I hope these two charts demonstrate is that, yes, the GBP was weak for the odd day, but most people (looking at you Sell-side) have been charting cable mostly, but we can see from the top chart that this was mostly dictated from USD moves. If my memory serves me, the US flash crash was very close to the UK election and this of course impacted USD pairs hugely. The TWI GBP is far more useful and we saw merely a flesh wound on the day within a strong up-trend.

Now of course I'm not looking to make a prediction of who is going to win... I really don't have a clue, however to me its clear that a fair chunk of risk premium is priced into options markets and spot FX although the past has shown us that even a shock result is necessarily doomsday for the GBP. We have these (imo) outlandish forecasts from the likes of MS, BNPP and barclays seeing the GBPUSD at about 1.4 by Q2 end, not something I really see as too likely unless the USD really gets a kick. In honesty I think the election will most surely result in stupid intra-day vol but in the grand scheme of the GBP (and related to its key drivers) I don't actually see it as too important.

Looking at the BoE/UK economy, sure, we can easily argue that the BoE missed the hike window and now we are pricing in another 14 months (MSM1KE) till we have that elusive 1st hike.

UK PMIs

GBP 5y5y inflation swap

Looking at most UK macro data pieces, the situation certainly isn't atrocious. PMIs are strong, the Labor market is not bad at all, real GDP at a steady 3% looking forward, Europe possibly turning the corner... all is good, right? well there are still some niggling issues, such as 0% CPI and wage growth, but ultimately I think the UK economy is still strong and has a strong outlook. I do apologise for the 5y5y chart, but if Mr Draghi uses it, there is enough reason to think that it may appear as one of the inflation indicators for Mr Carney, and well it sits fairly comfortably at 3.2%, far more anchored than say the Europe equivalent.

The last time I wrote about the GBP was a couple of month ago and I suggested a 1x2 put spread with spot around 1.54, and the max payout at 1.5... today we stand with spot pretty much at 1.50 and expiration in just over a week I've decided to cover this for a very nice return.

And from here, I'm looking to rotate into a long GBP risk reversal. Long 1.54 calls and short 1.42 puts. The rationale is that if the election passes and the result is acceptable we should see a bid across the GBP and the gap highlighted earlier will likely close. On the other side, even a shock (like 2010 was) may jolt the GBP lower, but it doesn't change the raw fundamental drivers for the GBP at least in the 3 month horizon and given the skew in implied, this structure is pretty much zero cost after fees/spreads.

Now looking at Rates, I've been reading much more on Swaptions, so I decided to look into a possible trade idea here.

EUR and NZD 1yf10Y rates

Global rates, as we've discussed plenty of times before are well anchored in this low inflation / high easing world we live in.. Here we see EUR and NZD swap rates (10 year 1 year fwd). With EUR rates, I get amazed day-by-day by the interesting world we live in, with negative Bund yields out to 9Y, and negative 3m EURIBORs etc etc, however I do think that the upward impulse in euroarea growth in the later half of the year will be enough to keep the 10Y rate from 0%, as such I am looking to sell 0% strike receivers with 1y expiration. I read an interesting piece from Soc Gen last week about the increase in implieds at the 0% strike and lower due to difficulties hedging and pricing these options, and so selling these looks good. The premium is around 4.4bps here.

Bill Gross came out today and suggested shorting 10Y bunds here, suggesting we could see a 10%-15% return from doing so.. a EUR 10 y swap currently costs about 2bps in carry/roll (mostly roll these days) per 3 months, so while I'm not overly keen on the exact timing its hardly an expensive short. On top of this, if we assume bunds won't go much lower than -0.2% for 10years, which is truly ridiculous given the whole macro situation in my opinion, then price appreciation is limited to a few % at most... so from a risk:reward its starting to make more sense. I've been in a long UST/ short bund trade for a while and its performing okay thus far, however I grow more confident in this, with EUR rates acting as an anchor and any EURUSD dip acting as demand for USTs.

USD -EUR 10s spread

With this premium, I look to buy receivers in NZD 10s. We currently trade at 3.775 and I think we have the potential to head much lower.

RBNZ 1 year expectations for OCR 

the market sees 25bps of cuts from the RBNZ over the next 12 months, however given the weakness in inflation, slowing growth, declining milk prices, very strong NZD we could see further dovishness from NZ. This makes me like the idea of receiving NZD rates, but buying a 3.42% receiver costs ~10bps.

NZD TWI

the NZD TWI traded new highs just this week! RBNZ won't be very happy...

The one obvious concern for the RBNZ is house price growth, which would be further fuelled by a move lower in the OCR to say 3%, however I think that this would be worth the benefits.

House price index

Overall, selling 2x EUR 1y10y 0% recievers per NZD 3.42% reciever is zero cost (ex fees) and positions me well.

One final quick look is on CAD.

CAD vs Oil

As shown from the chart above, we are clearly still in dynamic whereby oil prices are determining the CAD for the most part. Oil is up some 20% from its lows a few weeks ago, however one would expect heavy offers on these rallies, producers that are losing around $50 will be frantically locking in these prices, and increasing capacity limiting Oil's gains. From a technical perspective there are arguements to be made for a run through 60, however generally speaking Oil will be pressured, and as such so will the CAD.

Given the rationale earlier for the EUR rates, and the recent discussions we've had on European macro and the potential for a strong year, long EUR exposure is something I have been building these past few weeks. EURCAD therefore looks attractive, alongside EURNZD (given the reasons above)

EURCAD

Anyway, its getting late (/ early...) so thanks for reading, feel free to discuss etc. and if you're in london, do come to the Thalesians talk on global macro next wednesday! should be great!

April FX & Rate thoughts

Another month... more of the same, we saw the USD index trade up through 100 before reversing and slamming lower (currently 97.5), also persistent underlying strength in the UST market with 10 year yields firmly back below 2%. It also highlighted some under-performance in euro-area peripheral debt markets - Italian benchmark 25bps up from the lows.

Central banks remain biased towards being dovish, in part through marginally lower growth expectations but mostly through the continued disinflation. Still in part to the likely transitory impacts arising from the drop in oil we've seen.

2y inflation swaps, top-> bottom, GB, US and EZ

However when looking at market expectations, whether its because of further monetary easing or otherwise, there has been a noticeable up tick in inflation expectations (excluding the UK). 2Y EZ HICP swaps trading 50bps higher YTD.

This is important I believe, as it brings into question the likelihood that EGBs stay incredibly low. Further to what I looked at last post here, I still think there may be an opportunity in the not-too-distant future to position for higher EUR rates, not necessarily on the short end, but most definitely in the long.

A much thrown about chart in the last few weeks is the relative economic data surprises in the US vs Europe.

Citigroup economic surprise indexes

There has been a rather stark, almost equal and opposite move in data surprises. Which I can only really put down to the large move in EURUSD, data strength has been exported from the US right to Europe when it needs it most (kinda).

So right now, we've got a low EUR, decreasing real rates in Europe and QE... argue as we like about the possible success of QE programs, the environment is rather good in Europe for outpeformance and stronger growth.

This is highlighted from the BAML fund manager survey chart below.

So what does this all mean for us then... well I think this is supportive for European Equity for starters, but that doesn't come at a surprise, with the Dax up some 20% YTD. What is important about this is that all these inflows into europe have been currency hedged. So for every purchase of European equit, ETFs/fund managers have been selling EURs keeping it pinned lower. The question really is, 'at what point is the EUR cheap enough for portfolio managers to remove / have no ccy hedge'. I can't pretend to answer that, however without being overly presumptuous, most sell-siders have been targeting parity (or something lower) and with that around 10% lower I think the somewhat /lazy/ PMs will probably hold off for now against removing these hedges.

Furthermore we have the remaining issue of USTs yielding significantly more than EGBs, last time we saw the 10y swap spread at 1.6% and I suggested buying USTs / shorting bunds. We stand today at 1.48% and my convinction on this trade is growing. Not only in part from the bids into the UST complex, but also the possibility that long end EGB rates could rise.

I really like this bond pointed out by @macrokurd

Austria 2062, currently trading at a ridiculous 210. Ultra long duration and a prime candidate to short.. but lets be honest, I still wouldn't want to fight the overwhelming yield demand, but 0.9% for an almost 50 year bond.. come on! its gotta end soon!

More simply, do you short bunds? probably not. or at least not yet. How many times has it got to levels where 'it can't go lower!!' yet still does..

So what? Steepeners? hmm.. maybe, but difficult to decide where, steepeners in the 5s10s sector may work, EUR 5s10s swap is currently 30bps,

Or do we look to Euribor futures? - well here we have June 2018 implying 26.5bps, 2017 at 9.5bps. If we do see, as I expect, an uptick in Eurozone data then it's possible to see this curve steepen somewhat.

Another market that could be interesting to us is New Zealand.

We have an economy growing nicely, but a central bank that has just hiked the base rate by 100bps, and a market that has rapidly priced out further hikes accompanied by RBNZ dovish rhetoric. They still bitch and moan about a higher currency, and while the NZDUSD is far lower.. on a Trade weighted basis the NZD is still strong. Importantly, the AUDNZD, all time lows just above parity is key, and I think the RBNZ will continue on a dovish bias.

The RBNZ has hiked before and cut, nothing stopping them again.. I am sure, with inflation ticking lower we could potentially see a scenario (much like the RBA/BoC) where the bank cuts rates in a pre-emptive manner.

Combining the last two ideas, we can foresee a situation which would be beneficial for EURNZD

EURNZD vs 2y swap spread

There has already been a large divergence, and if yield spreads tighten then it should be supportive for the cross. It's hard to know why there has been such strength in NZD relatively, I mean firstly its hardly like volatility has dropped, if anything its much higher and heading in 0.8 direction (lol).

Just RFQ'd on a 6 month 1.50 digi call with 1.40 KO and it comes in at 28%. almost 4:1 risk reward ratio, though a 1x2 call spread may also look attractive.


Lastly, on the Fed. Whilst I was skiing, Yellen and Co. came out with what was seemingly a largely dovish move. FF futures and ED really struggling to make their mind up.. aimlessly wandering until NFPs or other good data comes out to suggest a strong US economy. Alternatively whenever the Fed speaks the futures leg higher (FFZ5 up around 12bps since Yellen).

It's funny, even if US data has disappointed expectations (as per CESI), its hardly bad. The Labour market is still strong, a solid 2.2% Q4 growth rate confirmed last weeks, PMIs doing fine... so Fed, what's the problem? To me, the economic picture is not drastically different to when the Fed was comfortable with a June Hike, and the removal of patience indicates we are close to that first hike. If we are then ED steepeners look good, alongside my short sterling steepeners.

EDM6-M7

A mere 2 and half hikes between june 2016 and 2017... if the Fed is serious about normalization, then I think we would see more than this.. however I'm not in this trade to see this realized, I think the curve is too flat given the state and outlook of the economy, and while the USD may be acting as a wind-break to US macro, its not a major game changer imho.

March FX & Rates outlook

There has been a lot of discussion in the past few months all about negative rates in Europe/Denmark/Switzerland, however I think what is more interesting is to consider the impacts on the Bund curve, against say, JGBs. Japan has obviously struggled with deflation for many decades now, whilst its a relatively recent wave hitting the European area. Tho this being said, every bund trades through JGBs across the entire curve!

JGB vs Bund sovereign curve

There are a lot of issues in the Eurozone, from growing Grexit concerns to structural fiscal issues, however I don't believe that we are going into a period like Japan.

This chart from Martin is one of many that show optimism in Europe:

#EUR: how about 3% EMU GDP growth? What a difference a month makes in sentiment, e.g. https://t.co/T6tYNnL2qT pic.twitter.com/WewvAnX08r
— Martin Enlund (@enlundm) March 9, 2015

It is of course worthy of note that the wave of disinflation/deflation has been exacerbated by commodity prices, in particular oil price declines, however the basing factor will mean that the impact will disappear from the headline figures over time. And whilst we may not see massive inflation, we may see a definitive pickup.

This might have quite the impact on Bund yields (and other zero-bound rates), primarily those in CEE.

HUF / PLN / EUR 5 year swaps

There has been a sizable uptick in Hungarian and Polish rates in the past few session, and it feels like there may be more pain to come, as even though there may be a global hunt for yields, what we may see is a re-convergence of longer maturity rates.

What I mean by this is that if large global flows are going to be looking for yield, the clearly you'd look straight to USTs. One would much rather own a 10y UST at 2.2%, than polish rates at 2.1% as per above for example, and these flows may act to re-converge all DM rates.

While at the same time the idea that bund yields (and other zero-bound 10s) could actually pick up.. Thus when we see the 10 year USD/EUR swap rate at 160+ bps I think that the upside is rather limited and we are approaching the ultimate highs.. its possible that Fed hikes and upside data surprise may shock this higher, but I don't think we trade too much higher, and considering carry and roll would not hate Long USTs vs short Bunds here.

USD-EUR 10y swap

Looking to FX now, the EUR has been really hit, currently tradig firmly under 1.10, with the DXY storming towards 100. On a technical picture there isn't much support until this channel as per below, around 1.04/05

EURUSD weekly

From a gut-feeling perspective it certainly feels like the EURUSD is situated at a worst case for Europe/ best case for US kinda area, especially given the pace of decline, and while fundamentally the USD is strong, we are way ahead of ourselves - but this isn't new and fading the USD is still too risky. But with the EUR side, positive surprises in the macro picture might start sparking inflows, thus far any flows into Equity/Debt (which are large) have mostly, if not all, been FX hedged. From a managers perspective owning the USD makes sense. Especially given the yield pickup as per earlier, and the "expected" appreciation. But these are flows that are unlikely to capitulate and reverse, so we need new flow into EURs, but from where? don't know. we'll see.

But I think EURAUD could pose a decent short term opportunity at current levels, trading the range of 1.40/1.50

EURAUD vs 5y spread

A potential double bottom here offers good value to get in and play this range, Both via a spot trade for a short term move, and a 1x2 call spread (3 month, strikes ATMF and 1.45)

EURAUD 1x2 call spread

Receives small premium if there is a break lower, and is starts to lose at 1.49 at expiry.

On to the GBP a little...

I posted this trade on twitter last week:

and a 1x2 put spread looks good (1.54 and 2x at 1.50), receive premium and protect down to 1.45 handle pic.twitter.com/4opphN7GLn
— Jere Wilkinson-Smith (@JeremyWS) March 2, 2015

Doing well thus far, with cable dropping towards 1.51, but obviously with this structure my delta flips from short to long if we drop much further so I need to be careful, but its a decent start and I don't think that we see the market getting too ahead of itself into the General election.

GBPUSD daily

Still quite a fair amount of protection being bought into the election (tho I would love to see a riskies composite against many currencies, because obvs GBPUSD is hugely skewed due to USD call demand, and EURGBP riskies skewed due to EUR put demand, so ya know, if anyone wants too then that'd be great :D )

GBP vol premium vs Global

GBP vol premium is fairly minimal, but on a z-score its quite extended against its mean going into the election (this is 3 month vols). But its not at the super panicky Scottish Ref levels yet.

Lastly, I am going skiing next week (yay!) and its a fab time to buy EURs... almost 1.40!

GBPEUR