Archive for February, 2012

And the Euro Carry is Upon Us

LTRO2 was tapped by ~800 banks, totaling EUR 529.5 billion.

Even though Dutch, Swedish and some other AAA country banks didn’t tap the facility, I’d just like to welcome the impending carry trade of the Euro against many regional yields. This is basically, if history does repeat itself, what happened to the dollar against everything when the discount window was opened in ~~2008, 2009 may very well start now in the Euro.

Although the method, agreeably (QE for MBS and treas to target rates vs direct loans) is different, the ECB’s scale of EUR 1.1 trillion to the Fed’s USD 1.5-1.7 trillion compared to the size of the economies, is comparable. However, even with many banks refusing LTROs, that money is going directly into the hands of the banks, who don’t always have the most accurate positions. But the money’s still out in the markets… all EUR 1 trillion of them.

With the ball in the Fed’s court after LTRO2, Ctrl-P Ben actually downplayed however much he can his dovish rhetoric. And USDJPY is now above 81. Despite that, expectations are shifting towards US easing. Action in the form of asset may be unlikely, but commentary will be sure to follow if any gears slip again.

And that gear? Well, seeing what happens with Greek deliberations, may very well be Portugal.

Anyways, trading EUR carries right now against the volatile ones PLN and TRY. Not so bullish on Nordies, since we are getting some commentary of bank intervention. Plus, the eastern European currencies still offer higher yields, with the rate no where near the historical lows.

And I quite like EURGBP with its positive overnight rolls. Safety and yields… mmm…

And hey, at least Poland, Turkey and those exotic ones aren’t printing. They have an inflation problem to say the least.

And for EURUSD? Let’s hold off until SSI turns… or Stolper sings.

To the best of good buys.



EURNOK (I’m long this one on err… hope………..)

EURSEK (Exited today for a short term scalp – too congested)



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On the fundamental side, what could mark that turn? The downgrade of Greece to selective default by the S&P earlier today didn’t seem to bother the markets, apparently carried higher by Merkel’s vote and new home sales.

But we do have two other high-risk events: PSI negotiations and LTROs.

PSI negotiations aren’t exactly finished yet, and the balls are currently in the court of participants, ie mostly hedge funds (currently causing the trouble as they can’t get LTROs and don’t have that much margin left). Given the participation rate is expected at around 66% of total nominal value, that shouldn’t be a problem…

So the second round of 3 year direct bank loans/LTROs on tap for the 28th and announced on the 29th. The number is EUR 489 billion, the record of the last one in December. On the risk consideration side, for all meanings it is risk-positive, as the funds basically backstops banks from a quite possible crunch when some country does decide to go back to its legacy currency (on the 29th).

What would a higher record mean? What would be a lower? For all cases, there are pros and cons of both a higher and lower turnout. Forgetting having to draw an entire heatmap of outcomes, the direct effect will be Euro dilution, and in the bank’s case, having money for more carries. Barring interest rate effects, this will be the ECB’s very clever and not-written-into-as-expressly-prohibited-Lisbon-treaty easing, giving funding directly to the banks locked in at 1.00%.

There are at least 5 stable AA+ or higher countries with 2 or 3 year yields above 1.00%. Namely Australia.

Exchange rate risks? Possibly, but not if it’s a boom economy. Only if there’s a recession will there be a massive FX rate-caused implosion of carries (yen, 2008-2012…). Plus, banks can always get an option protection against downside. 3 years shouldn’t be that expensive… but again, don’t really have data for that OTC market.

And if the Aussie is too reliant on Chinese growth, SE, NO, PL (and maybe even HU!… provided your risk appetite…) sovereigns should provide the adequate fundamental reasons for carries.

*And on a side note, the ECB has an awesome statbank and interactive yield curve chart with forwards and all the fun stuff!

So anyways, no matter if the LTRO2 requests total EUR 200 billion at the low end or EUR 750 billion at the highest (I’ve seen so far…) Draghi is a smart and devious GS man, sticking it to the thrifty, saving and price-stability pursuing Deutschesvolk.

Given the state of the European economy, rates should stay low for at least quite a long time, even with inflation pressures (and to add a comment, beginning to show in Eastern Europe). But with the 3 year LTRO, banks are guaranteed that 1.00%. If I was a bank, I’d just borrow however much I can, try to cover my own assets first, and then do something risk-free with them.

But these are banks, run by people, and they are greedy.

I need to look at ECB balance sheets (sovereigns purchases) and deposits (how much of that LTRO1 money went back) when I go back to the office…


To the best of good buys.

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EURUSD 5th Wave Pivot?

Had enough fun scalping fully risk-on through USDZAR, less USDSEK and a few others. Directional volatility is calming down, though in the case of 1 up 1 down.

So, with almost all risk-on pairs reaching historical RSI resistance again, it’s time to start considering factor, new trading plans and the whole lot of revisions to catch the next wave either sharply lower or drifting.

Starting with a technical chart, the EURUSD 1d. The Euro has seen quite a remarkable 2 week run upwards, compared to the SEK, ZAR and other risk yielders. The only things it has relatively underperformed has been the PLN, CZK and HUF (EURHUF is now around 290).

What does this mean? That rally was just a risk-relief, carried more by sentiment rather than rates. Take a look at EUR LIBORs across the board and they’re still getting crushed by the ECB’s quite admirable new works, while peripheral yields seem to tell more of the story.

Here’s the chart:

Currently trying to learn Elliot Wave analysis as well, so here’s the first try. The newest run with actually good looking and discernible legs is on its last wave. Although this 5 runs, 3 corrections does seem to fit this analysis quite well, do be reminded that this is on a descending channel, while an actual EW should fit more of a bottom to peak to bottom pattern.

Nevertheless, it seems that the Euro should be taking a turn. The next item is to find the optimal pivot.

And on a longer term chart, seems likely to be the 50% at 1.3750. That line has set most of the peaks before a major reversal, though the current channel running right now has developed into a reverse pennant… odd…

And the next post is here, counting some fundamental reasons for the pennant, including some thoughts on LTRO and the introduction of the Euro carry.

To the best of good buys…


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Sure, this is a sign for new entries, but for me, with only around 20% margin left, I’m just going to be moving my stops up…

All charts. Please enjoy, jagshemash (note, newest candle is today’s live one for Feb 24th; yesterday’s has passed resistance on almost all dollar crosses)

Below are 5 charts which I think are the best to play this (possibly very short) trend out. Waiting to EURUSD 1.35000 to carefully monitor again, or when Stolper gives the call.

To the best of good buys.


USDSEK fib break, target 6.5000

USDZAR – congestion break, target likely 7.5000

EURUSD – cloud break, targeting most likely 1.35000 (wick up, I think)…

EURCAD – whoa is there a better slightly risk-positive/lesser vol base pair than this? Though… maybe it’s still better with just EURUSD…

EURGBP – Waiting if this is a start of a true pivot. Will be watching rates closely for this, as pressure is definitely on the BoE’s side of things…

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Will be watching what happens once we get back to that 80 level. As the yen market is also relatively broken right now, there’s no real evidence yet before we see it how this will go with risk trends.

Shirakawa/bank calculations also mentioned today that a 1% rise in 10yr JGBs (though a year) would cause large Japanese banks to get hit by around 3.5 trillion, regionals to get by 2.5 trillion.

Haven’t really plugged in the numbers yet to see what that would do, but this at least ensures us that BoJ rates/QE policy won’t change, handing fx traders like us a good way to track US yields (or for that matter, yields on others barring risk-aversion FX losses… yeah just trade USDJPY).


Anyways, closed out at 80.200 and watching for a better entry price. Preferably at 77.000/77.300 looking at the week of gains following mass intervention almost a year ago.

Historically, I don’t think we’ve seen a daily-14 RSI this high…

Anyways, 2 days of spinning top dojis. Let’s see where markets take it so we can get some sort of confirmation.

To the best of good buys.

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Simple S&P500 Technicals 2/22/2012

Writing this with futures at 1000GMT or so (European market hours) so we’re getting a bit more info that if the study was at the close of US markets. Unfortunately, that bar for 2/23 isn’t really convincing, and with low volume, central bank asset purchases and decoupling getting in the way, monitoring the S&P is basically trying to figure out when the next dropoff in risk will be.

We are getting there – though trying to call tops isn’t exactly my thing. We stopped short of passing the 1370s when sellers took over as the Dow hit 13000, but once again on low volume.

On the technical side there’s not much to say, though we are approaching overbought levels (only on S&P/equities! USD risk pairs have calmed!). However, we are still following that channel set since earlier this year. Additionally, we could be in the last stages of a flag pattern, so a retest of 1370 isn’t all too impossible.

Still depends on your bias, though. Of course the LT view is for the RSI to eventually decline, but again at what pace. Take a look at how the RSI is covered and it reveals if there’s a low volume drift downwards, RSI will take that out and average it out instead as times go on.

Well, I’m just holding long USDJPY and short USDZAR. Take a look at USDSEK, USDNOK, AUDUSD, NZDUSD and you’ll see we are sitting on short legged dojis on the fib (particularly for USDSEK). Doesn’t give much confirmation right now, but we would need to wait for market close today to get any kind of good indicator.

For now, at least Jun Azumi’s Secret Interventions are working out. This does seem to be a major structural shift in USDJPY as yield spreads still don’t really explain that 400 pip (~5%) drop in the yen in just a week and a half.

To the best of good buys.

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Two curves: the first showing the entire curve last week versus this week (before and after BoJ action). Sure, yields fell as expected of bank easing, but is that enough to overcome the strong yen (yeah, the yen is used as a haven and not yield currency, but you know… for USDJPY it still depends on yields)…

Second chart: spreads between US treasures and JGBs, basically the driver of USDJPY on many reasons. Of course the challenge is for the MoF/BoJ to push down short term 2 year yields even lower, but err… they’re at the 0 line already. It’s like the Taylor curve almost…

The could however, also try to damp 30 and longer term charts. There is some controversy over this, as after this last resistance the return on savings for Japanese and JGB bond holders will collapse onto what little there is left. However, with all Japanese investors and savers, it will help with the performance of uridashis.

Just for fun, here is the historical spread between the two in 2008 (USDJPY around 100-110), before QE, active intervention and the crisis messed up natural market information. mmmm look at those massive spreads….

Not to say anything, but from the current standpoint of a stagnant (rate-wise) Fed and BoJ with their backs against the wall, that recent USDJPY rally does seem extremely odd. Unless Azumi’s secretly intervening with more gusto than his open ones or the BoJ is also actively participating as well, USDJPY should still be lower. Nevertheless, I’ve entered 3 lots… because USDJPY will always go up, just depending on the time of your holding and how much margin you have.

Changing to all longs this morning with stops to breakeven…

To the best of good buys.

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