Waiting with bated breath for Thursday ECB meeting


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.


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.


Time to OZ …. AUD has probably lucked out!


Illustration 1: AUD/USD vs. IMM Commitment of Traders (Non-Commercial) positions vs. AUD/USD 1-month risk reversal vol skew … all points to AUD at risk of correction lower

Asianmacro has previously opined on Australia and AUD .. the lucky country that happened to have all the minerals underground that China and the rest of the world needed http://tradehaven.me/2013/02/12/to-oz-or-not-to-oz/.  The range for AUD/USD is 1.03 – 1.05 on the narrow with risk of overshooting on either side especially the lower bound on any significant China flu or global risk off.

Australia employment report is out this coming Thursday 11 April 2013 and I don’t know about you but with all the global economic data hitting a softer patch especially on the employment front, and with commodities (precious, base and softs) correcting lower over the past month, I will be damned surprise if Australia can be so lucky again !  From Illustration 1: the market in AUD/USD still seem pretty long from the IMM CFTC commitment of traders report (non-commercial).  In addition, there is still a skew to calls over puts in the options market.  There exist relatively cheap opportunities to be playing Australia turning on its luck via outright short AUD/USD or put options spreads and strategies like 1.035 put RKO (reverse knock out) 1.0550.  We target 1.01 level in the next 1 month if this plays out well enough for us.

The nail in the coffin I think for Australia is the recently announced changes to the Superannuation plan where new taxes (where there wasn’t are introduced) to rob the chaps down under.  *Please see summary below (where essentially Superannuation contribution are after your earned income already already taxed and now you are taxed again on your returns from your superannuation that is supposed to support your retirement!)

Superannuation changes

  • From July 1 2014, earnings on superannuation pensions and annuities of more than $100,000 annually will be taxed at 15 per cent, instead of being tax-free.
  • Superannuation earnings below $100,000 a year will remain tax-free and this threshold will be indexed to the Consumer Price Index.
  • The change will not apply at the accumulation stage.
  • The Government says around 16,000 people will be affected by this reform, which will save around $350 million over the four-year forward estimates period.
  • From 1 July 2013, people aged 60 and over will see increased concessional caps from $25,000 to $35,000.
  • Excess concessional contributions will be taxed at the individual’s marginal rate, plus an interest charge.
  • The Government says this will mean individuals are taxed on excess concessional contributions in the same way as if they had received that money as salary or wages.

There are some opinion on this matter http://www.afr.com/p/business/financial_services/super_tax_may_hit_accounts_under_3xxgtzhxnNCaKTJU67cMHP.  If I am a chap down under, I will find various ways and means to get all my money out of the country before it is rounded up unfairly by the Australian government … no surprises why so many Australian billionaires have or are thinking of moving to Singapore!



And we definitely expect to see more Aussie names in the richest Singapore residents list shortly http://www.altiusdirectory.com/Society/top-singapore-richest-list.html



*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.