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Archive for March, 2012

Quite a long-term bleed on this chart, which I have been watching since around 1.5000 since it entered the cloud. Aussie rate expectations haven’t fallen off that much yes? And it seems GBPUSD has put in quite a substantial double top.

Anyways, good enough for a single day trade as we have intraday reversals after hitting cloud resistances on all major commodity currencies (SEK, NOK, ZAR, though not CAD…)

Reminds me of what the Barmy Army sang to the Aussies: “Your next queen is Camilla Parker-Bowles, Camilla Parker-Bowles, Camilla Parker-Bowles.” That’s right… confusing and quite ripe for a comeback like the above chart…

Trading blind here with no rate expectation conf… oh well, Spring Break is almost over…

To the best of good buys.

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Breakeven Rates

You know… it helps me pick uridashis, although with UK filtered out and have to find some synth index for Turkey, Hungary, Poland, Israel with some other things translating them into rate expectations…

 

 

Also, Canada’s 10yr breakevens are at a 2.10%, which isn’t all that high.  I guess that’s one of the benefits of having a commodity currency is that headline is relatively constrained. But you know, it does have the best correlation between breakevens and CADJPY, though the translation of inflation rates into rate expectations is a bit fuzzy because of natural rates and that sort.

 

To the best of good buys.

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So to finish up in this post before the data goes stale… which it seems to be, worn away by the markets with every trade as another slowdown from China takes hold of overall appetite.

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Continuing on CSSTs/OISs/Central Bank rate hike expectations on the basis that the markets are forward looking and FX largely follows yields, the crowd is further whittled down to the single, most correlating pair – USDJPY. Seems to be the best choice currently and probably for the rest of April as China slows and the Riksbank may follow the Norges Bank in cutting rates even if it means inflating a bubble.

Keeping it short and relatively simple because by last Spring Break has started – and will be spending trying to understand Black-Scholes, here’s a chart of CSSTs. These are indexed rates, so it shows % change since January. Also, because the data are indexed, they don’t really show how many times of 25bps increases OIS are showing… but what we’re doing is all relative.

Which immediately shows USDJPY as the best pair to trade the decline in US yields. The other ones do have some support as rate expectations for the other banks are increasing as well, but the pair with the greatest gap remains Fed-BoJ/USDJPY.

And taking a quick gander at AUDUSD and RBA-Fed, although we see that the correlation is still strong since the rate-tracking regime, the change between RBA and Fed expectations shifting negative. No matter if this is from RBA rate cut expectations (very likely pending Chinese PMIs) or that Fed expectations are outpacing, this would discourage buying AUDUSD to track lower US yields.

And thus at the moment, I am short EURJPY… through some odd reason that has been washed over…

So the best pair to trade is short USDJPY for a yields-tracking view. I think I would have known that without doing all this research, but it is interesting seeing RBA-Fed spreads shifting lower, possibly meaning that 1.05000 or so would be the top for the Aussie even with the 2014 ZIRP. Even though in the long run USDJPY will recover higher, shorting USDJPY provides a good short term trade, especially as the yen has crashed through quite a few resistances these past 3 sessions.

Here are the complete charts. TreasYields2

Buy safety for April? To the best of good buys.

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It seems like the second right shoulder has been reached – a small short placed right now since my overall bias is for T-Note yields to correct lower. However, we do have expected lower UK CPI coming later today in the Euro session, as well as Mervin King’s policy of sustained easing.

Keep the entry small for confirmation/denial (will remove that narrow entry at 1.5920). This will probably be the first trade in the new cycle… target will be former low of 1.5330, stop 1.5970

Also, monitor EURUSD since EURGBP has completed its small pattern, while GBPUSD seems ready for it. EURUSD still has a bit to go, which will also support the new upward channel for EURGBP while the yields/rates narrative is still in play.

To the best of good buys.

 

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We start with the below post here and this picture. Replace the 30 with 10 and it’s still pretty much the same thing..

 

… and a return to the thesis that the Fed (especially with its current board and situation) is a growth-fostering, not a price stability central bank. This, and the fact that recent manufacturing and consumer confidence data have been dampened by the increase in energy prices further the possibility that instead of keeping prices under control, will further try to ease or in our case, talk down rates. This provides us with a perfect opportunity to trade what the fed is seeing (the recent jump in yields ripe for a reversal). We just have to pick the optimal pair.

Also, if history teaches us anything about the (independent-HAHA) central bank, it will try to keep yields low to not bankrupt the treasury. Not a strong point, but nevertheless a thought…

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Because our pair finding ultimately comes down to the performance of each country’s yields and spreads against the expected lower US yields, let’s start with a simple correlation of selected pairs first. Note EURUSD is out of the mix because the European debt market is very interesting… and quite crowded

oooh let’s clean that up a bit…

So with monthly correlations since mid-Jan (the start of the shift from risk to rates), we see that AUDUSD, USDSEK, and the very well-expected USDJPY making the short list.

For the sake of efficiency, simplicity and time, we will focus on these three pairs. Fundamentally, these pairs represent the overall FX market quite well, with AUDUSD a leveraged proxy of Chinese economic growth, USDSEK for European commerce, and USDJPY the raw play on just US yields. Also, none of these have negative intervention risks… yet…

Here’s a better view of the spreads so far and FX.

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So what will be the best pair to carry this order? Because the current err… bias is for US rates to come down this week, the most opportune pair will have best rate growth (for various reasons) expectations. Luckily, there is Credit Suisse’s Central Bank rate hike index/CSSTs based on overnight swaps (OIS). This index is awesome.

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arrrrgh can’t finish this… must sleep…. Here’s what I have of the charts so far, and I’ll finish the rest tomorrow. I wouldn’t buy any higher yielders against yen. That’s all, really, and keep watching dips to buy risk against dollars. TreasYields

To the best of good buys.

 

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Yields explain all

These are 10 year yields, not 2 year yields, but using the longer term index since it’s more liquid, and though having less guidance on FX spot rates, do track them.

Candles are 10 year yields, yellow is USDJPY and green is USDAUD. Notice how the USD-Aussie correlation is starting to trend away from even the high US yields? It seems that markets are once again doing carries post-Greece, using dollars once again as the funding.

(Also, similar correlation for USDEUR, even though overnight interest are comparable – the fact that the EUR is also strengthening even with higher US yields could show a turn in rate expectations for banks around the world).

Lots of rate studies coming up today… since S&P correlations are basically now in tatters.

To the best of good buys.

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We shall start later with this chart, with studies. Note that we’re at the old high, which is also a fib level. Quite a bit of resistance, eh? Though we don’t know yet if the (expected) lower yields will be caused by risk or easing. Anyways, if current correlations still follow through, meaning that it’s not going to be a sharp drop due to something in Europe exploding again, it could point towards a weaker dollar, especially geared up against the high yielders.

 

Or wait… looking at TIC flows, are banks going to chase this? … (Remember prices are inverse of rates!) Although bank interest is hard to gauge since the index includes sovereign transactions. Still, it seems like we’re getting higher nominal interest, even though % change is softening.

 

 

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Basically, all prices are up from last year. I’m going to start tracking these indices to see inflation effects for no particular reason except that the beef board gives relatively good data.

These are also wholesale prices (WPI/PPI) so increases here should be geared higher once it reaches the consumer market.

And it looks like USD yields are about to fall off a cliff again… maybe because demand for T-notes are falling? No, that doesn’t make sense because yields would be higher, so it’s yield differentials at play here. Thus, USDJPY.

Here’s the Wholesale Pricing Chart 012712.Green is up YoY, red is down YoY

To the best of good buys.

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