By Giles Wilkes, normally found at Lex or writing leaders.
So on Wednesday 23rd March, three month implied volatility for the proud pound was 14.5 per cent, which is up a third from 11 per cent the day before.
For an options market maker, such a move in ‘vol’ is a pretty big deal: expected volatility in a market is the major factor driving prices, and being caught the wrong way on such a move would be enough to cause a fairly large loss. But that is not what happened.
The reason for the change in three month vol was rather more mundane. Read more
A few weeks ago, Michael Masters, of the eponymous US investment firm, made the point to FT Alphaville that bad things can happen whenever investors mistake the fruits of production for the means of production, and apply long-standing “long only” strategies (more suited to equity index markets) to assets like commodities.
Earlier this month, Nomura put out a note that observed much the same point.
Specifically, they argued that commodities should be treated like currencies and valued with macro-trading tools that incorporate the concepts of carry, value and momentum. Read more
Debate still rages about the merits of last week’s Swiss National Bank move. Peter Doyle, economist and former IMF staffer, argues that the SNB in fact kept its exchange-rate cap for too long — and was wrong to have targeted the euro alone.
__________________________ Read more
At least for the majors. Just some annotated charts courtesy of HSBC, click to enlarge:
Alternate title – Did Goldman Sachs lose $1.3bn in currency trades in the third quarter, or not? Read more
Consider this from Morgan Stanley’s FX team:
A telling chart from Citi’s Steven Englander:
Creaking where, actually?
Here’s a useful exercise from BAML on Thursday — at least if you can assume Indonesia’s the emblematic economy for everything that’s made emerging markets look so ugly this summer. Read more
If you were wondering how fears over policy ‘credibility’ could send the Sensex in such a spin on Friday — India’s benchmark closed down almost 4 per cent — and trash the rupee…
Here’s an illuminating chart from Nomura: Read more
That’s the Turkish two-year yield rising above the 10-year earlier on Wednesday — chart via Reuters:
According to Nomura, since 1980, there are only two periods of economic divergence — between the US and Europe and the UK — comparable to what we are observing currently.
That’s the new black according to Citi’s Steven Englander:
Since May 1 the median increase in 10-year local bond yields in 47 major EM and developed markets (DM) is 39bps (Figure 1). Among major EM economies (light blue) it is 83bps; among major DM (dark blue) economies it is 29bps. The US 10-year Treasury yield increase (red) is only at the median of developed economies and well below the overall median. In both EM and developed economies, the fat tail of rate increases is to the upside, so average increases are even higher. The paradox is that the run-up in US interest rates, which is arguably the primary driver of these global rate increases, is well below the average and median globally.
Header credit goes to UBS’s Paul Donovan, the source of the piece of Japanese skepticism that follows. He takes us first to Sherlock Holmes’ “Silver Blaze”:
Gregory: “Is there any other point to which you would wish to draw my attention?”
Holmes: “To the curious incident of the dog in the night-time.”
Gregory: “The dog did nothing in the night-time.”
Holmes: “That was the curious incident.”
A strong opening gambit, as yen tales go. Read more
By Theo Casey, marketcolor
The loss of simple narratives in forex is something we are learning to deal with together. To continue navigating major and minor crosses we need to make complex narratives more digestible.
Consider dollar-yen. It’s behaving like the bought end of a carry trade. Read more
The yen has gained back 2.4 per cent against the US dollar since it threatened but failed to break Y100 ahead of the most recent, and quiet, Bank of Japan meeting — the first since April 4, when QE on steroids was announced.
Now, we are not suggesting this is definitely the start of a yen correction — if we could predict FX moves for sure we’d be on a yacht, Japan isn’t lacking the political will to give it a further shot, this dip is small in context and we’ve seen its like before — but there is clearly a threat.
Simon Derrick, chief global markets strategist at Bank of New York Mellon, sent through a few thoughts which we think capture that threat quite nicely: Read more
(Or ‘goldilocks syndrome’ if you’d prefer)
An existential cry has been sounded once again in the world of FX which has suddenly been reduced to trading short term signals in a fickle market. Shocking. Gone are the days of simple carry, Risk on-Risk off and easy reifying market stories. And it seems they are missed, almost as much as they were once bemoaned…
From HSBC’s ever excellent FX team: Read more
Seemingly everybody is benefiting from the Bank of Japan’s decision to splash the cash. Peripheral bond yields in Europe have fallen and high-yielding carry targets such as Mexico and Brazil are being touted as destinations for Kuroda’s cash.
Where that cash ends up will in many ways define the success or failure of the Abe/ Kuroda push since what really matters is what happens after the cash has left the BoJ. Read more
Gloves off from Kuroda and everyone is very excited…
For those who need a rundown of what the BoJ actually did, here’s a summary from Nomura: Read more
Two charts for your morning consideration:
We’ve used that kind of header before… but Abe is forcing us to crack it out again. From the FT on Tuesday:
Japanese Prime Minister Shinzo Abe has said that the 2 per cent inflation target he imposed on the Bank of Japan may not be reached within two years…
In an exchange with Seiji Maehara, an opposition politician and former economy minister, Mr Abe said the BoJ should not pursue the inflation target “at all costs”.
He struggled as a young bureaucrat on a climb with officials and journalists up a 1,500-meter (4,900-foot) mountain in Nagano Prefecture, to the west of Tokyo, according to Utsumi, now president of Japan Credit Rating Agency Ltd. Kuroda “got exhausted and said he’d never do it again,” he said. “He’s not the sporty type.”
Metaphors aside we can ignore that but the rest of Bloomberg’s profile of the man set to take over at the Bank of Japan is worth a read. After all Kuroda has to convince the Japanese that Abenomics is for real now that much of the easy lifting has already been done. Read more
Rising inflation expectations and a diving Great British Krona helped another leg downhill on Tuesday by dire production data.
This does smack of desperation, doesn’t it? From the FT on Thursday morning:
Osborne will use his Budget on March 20 to reinforce his message of “fiscal conservatism and monetary activism” by clarifying how the government intends to use monetary policy to get the economy growing again.
That’s the euro down 0.4 per cent or so against the dollar and crossing the $1.30 mark. Sterling (aka the Great British Krona) is also continuing its torrid start to 2013, losing another 0.9 per cent against the dollar and touching $1.50. Read more
Gotta love a good contrarian yen call.
As we’ve written multiple times, the yen’s recent fall been based on policy which has yet to appear, namely on expectations of Abenomics. Japanese authorities have done an excellent job of short-term monetary fear-mongering, but as Gavyn Davies put it recently there is a severe risk that the international hedge funds which have been driving the decline in the yen might come to the conclusion that the emperor has no clothes. Read more
All this has happened before and will happen again… at least, so hopes the Japanese government.
Current finance minister Taro Aso has been keen to channel the spirit of his 1930s equivalent Korekiyo Takahashi, whose polices are widely credited with pulling Japan out of the Showa Depression. It’s understandable. Read more
Dear everyone, this article is based on a questionable premise: that the dollar is about to head off on another bull run. We know this may not happen. Thanks, us. Read more
That’s Citi’s risk-warning signals beginning to spike over the past couple of weeks and especially over the last day or two. From Citi’s Steven Englander: Read more