I looked through pricing of hikes during hikes in currencies with exchange-traded STIRs for approx. last 15 years. I could not figure out how to quantify using data sets when the hikes got into the priced , so I looked at graphs and summarized the findings of market expectations with some discretion as: right, corrected and wrong. Right expectation is roll-down sufficiently high to avoid losses from going long white/red contracts. Corrected expectation is a sell-off in white/red/green’s either shortly before a hike or in the beginning of a cycle to correctly price the remaining hikes. Wrong is STIR yields trending up as market realizes after each hike that it was not actually the last one.
In my unrepresentative sample that mostly covers mid 00’s global tightening having the hikes in the price was an exception and not a norm. In most cases there were sell-offs a few months before the hikes to give provide with at least some roll-down against the hikes, but in some cases the mispricing was egregious (BoE 2006-2007, RBA 2006-2007, Fed 2005-2006). Sometimes it worked to go long the futures for at least some time after the first hike (Fed 2004, RBA 2002, BoC 2002, BoC 2004, BoE 2003), but led to losses if keeping the long for too long (Fed 2005-2006, BoC 2005H2, BoC 2003H1, BoE 2004H1, RBA 2006-2007).
I have also looked at currency moves during expectation adjustments. Most of the time currency direction during tightening expectations was in line with theory: tightening -> stronger FX. The notable exception was GBP weakening in July 2003.
Would be interested in quantifying this to add some rigour cus looking at graphs leads to slightly different conclusions every time I look at them.
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Q2 oil demand did not go down, so it’s a seasonally strong result. Production surplus stood at 0.4m bpd. Now in q3,q4 we get some 1.6-1.9m demand-pickup using OPEC forecast and over 3m using historical seasonality, then 1.3m more bpd demand in 2018 (opec forecast). OPEC members that produce now less than they did in Aug-2016 (ex Venezuela) could add back some 900k bpd, Russia could add back to 300k bpd. US, Canada, Mexico, Venezuela could pump more, so it’s not clear if 2018Q4 will be a deficit/balance/surplus of production.
A more interesting question is where production will come past 2019. In 2016 Saudis said that they could produce 12.5m bpd (900k above aug-2016 peak) but investments were needed. Libya could easily fill the gap if political environment was fixed (1m+ bpd). Iraq could probably add some 500k, Nigeria 500k+. Essentially every country getting to its capacity is sufficient to meet the demand. Almost flat Z8-Z9 and Z9-Z0 suggest that the market expects that there will be sufficient supply in 2019-2020. It seems hard to form any strong view on this top-down without knowing the projects in development and rate of depletion of older fields.
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07.08.2017 week
let’s try a UXY-WN steepener: short 5 UXY U7 @ 135.359375, long 2 WN U7 @ 166.1875 (53bps spread).
Typo: +5 UXY, not -2 WN
EDU1-EDU2: -750 USD
Long AUDNZD: +80 USD
Short EURCZK: -622 USD
Short EURNOK: -615 USD
Short EURUSD: -825 USD
UXY-WN steepener: +703 USD
Long bund vs gilt: -2620 GBP, +2820 EUR
Long bund vs IR Z0: -1790 EUR
ER Z7-Z8-Z9: 0
Total: ~-4221 USD
