Waiting with bated breath for Thursday ECB meeting

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Asianmacro has many close friends in the ”real world” i.e. people who are engaged in real productive businesses or employment like doctors, engineers, businessmen, lawyers (OK maybe not lawyers) …. where FOMC. ECB, QE & other financial lingo don’t mean much to them! However, what you do not know nor care in your regular life in going for work in the morning at 9 a.m., punching out at 5 p.m. (if there is even regular hours anymore like days of old!) does not mean that you will not be affected by events & developments which only financial market practitioners care about to monitor with a hawk eye.

In fact since the 2008 global financial crisis, everything that has happened especially in the real world & economy affecting many lives can be traced back to financial markets development & actions taken by governments & central banks since.

The most important event coming up with reverberating effects globally with be this upcoming European Central Bank (ECB) meeting on Thursday 5 May.  All expectations are on Draghi, the ECB President to cut Eurozone refinance rate and unleash their version of QE as well. http://www.reuters.com/article/2014/06/02/us-markets-forex-idUSKBN0EA11M20140602 . From the chart above, we can see that EUR/USD has plunged from 1.40 to 1.36 currently in the past one over week end May as short positions (*best captured by the IMM CFTC net non-commercial positions) reached the highest level of shorts in 2014. Risk reversals volatility prices (where price of calls over puts) have fallen as well with options market pricing more demand for EUR puts over calls.

In the chart below, in fact, Citigroup Pain Index is at an extreme negative level. This is a FX Positioning Alert Indicator that infer positioning of active currency traders from relationships between exchange rates and currency managers’ returns. A positive reading suggests that currency traders have been net long the currency and a negative reading suggests that currency traders have been net short the currency, and in this case, the market is extremely short EUR.

We can also see that the yield spread between 2-year EUR rates & USD rates have gone to an extreme level since EUR rates fell a lot more & quicker in the recent weeks vis-a-vis USD rates.

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When the entire sell-side screams for lower EUR & for further short EUR recommendations into ECB meeting, this is when Asianmacro gets worried over the imbalance of sentiments. Sometimes, the markets have no logic beyond street positioning & will go to the maximum pain to squeeze out the weak hands. As such, I have close out my short EUR/USD position & in fact turned long via 3-day EUR 1.3600 strike call options NY cut expiry (NYC 10 a.m. expiry which is right after ECB meeting decision & when the ECB press conference is underway). From illustration below, it cost my only 33 b.p. (or an equivalent of 40 pips in FX terms) with breakeven at 1.3640. If Draghi underwhelms in delivering an ECB cut & tone in his press conference, EUR/USD might just fly up to 1.3750-1.3800 level and I will be a happy man via my options & allow me to re-sell EUR/USD to take profit & establish new EUR shorts if it make sense again. If ECB overwhelms with aggressive cut & dovish undertones & EUR/USD plunge further, I don’t lose much beyond my small option premium for the call option that will expire worthless.

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The Schizophrenic EUR … Time to Short the Spike !

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Illustration 1: EUR/USD schizophrenic 2 big figure range on 4th April 2013 .. initial plunge followed by spike

The FX market is always taken to be the most efficient in discounting news ahead of all other asset classes.  However, Asianmacro having cut his teeth on the FX and rates market years ago only understand too well that it is also a fallacy since the FX market tends to over simplify things based on ”sound bites” and it often over-reacts.  FX markets are always about daily to intra-day short term momentum and ”’hunting of stops to trigger” in each hour and never about medium term (and God forbids any association with long term valuation discovery!).  As such, from Illustration 1, the schizophrenic plunge and then spike in EUR/USD around the ECB press conference yesterday is just another day in the park.

Asianmacro does not believe that ECB will not at some point find ways to drive EUR weaker as the Central Banks of the world are engage in competitive devaluation ”currency wars” whether openly like BOJ or stealthily like the U.S. Federal Reserve in the past.  Europe cannot afford a strong EUR and short of allowing a breakup and letting the Lira, Peseta and Franc back to the realm, the EUR needs to be weak again to give the mix bag of countries in EU any chance of staying together.

 

 

*Asianmacro is a beach bum managing his own wealth.  Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself.  While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or  implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith.  Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication.  This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.

Did BOJ just saved the world ? …. For now …

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Illustration 1: Key Central Banks’ Balance Sheet as % of GDP … BOJ is the Champion and still going strong!

It was looking bleak in Asian markets in the morning with heightened geo-political tension overnight on the news of the U.S. missile defense system deployment to Guan that knocked S&P500 futures off its pedestal and KOSPI down 2% and looking to fall more precipitously.  China and Hong Kong markets were also closed for 清明节 (Qing Ming festival), the annual ”tomb sweeping” custom of praying to one’s deceased ancestors that can potentially usher in the ”Ting Hai (丁蟹) effect” too from 4 April 2012 onwards. http://tradehaven.me/2013/04/01/be-warned-the-ting-hai-%E4%B8%81%E8%9F%B9-effect-may-kick-in/.

But all that was to change with the ever ready-to-please his political masters, BOJ (Bank of Japan) Governor Kuroda when he delivered the QE (Quantitative Easing) manna from heaven at the conclusion of his two day BOJ policy meeting. http://uk.reuters.com/article/2013/04/04/uk-markets-forex-idUKBRE92L08Y20130404 

From above Illustration 1, BOJ is on a viagra inducing roll by increasing its balance sheet even further in both absolute and relative terms to Japan’s GDP.  We can see that the U.S. Federal Reserve has sort of reached a plateau in its QE ballooning of its balance sheet as % of U.S. GDP.  In fact, ECB (European Central Bank) and BOE (Bank of England) have both reduced their respective aggressiveness in QE where their % of GDP has turned and are actually heading lower since Q4 2012.

With the ECB policy meeting announcement due in a couple of hours, it will be interesting what ECB Chief, Trichet will deliver.  While Asianmacro do not expect a rate cut (Good Lord if he does and we will be in high heavens in bunds and DAX if he does that!), Trichet is likely to sound reassuring dovish in the statements and in putting some expectations of that out.  The key is to weaken the EUR (*return of beggar-thy-neighbour FX depreciation policy) as it will indirectly be a ‘devaluation’ option for the Club Med countries that are facing the economic stresses at the moment without the need for them to leave the EUR in going back to their Lira, Peseta, Franc etc.

While it does not change the bigger picture that I have presented in my previous post over the last 2 weeks, in the next hours – days, just be prepared for a short term liquidity boost expectations rally in stocks and for USD to continue to strengthen. Long USD & wear diamonds ! http://tradehaven.me/2013/03/14/beware-the-ides-of-march/

 

 

*Asianmacro is a beach bum managing his own wealth.  Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself.  While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or  implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith.  Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication.  This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.