macro paper trading

macro_paper said:
- 1 IK Z7 @ 139.84
+1 RX Z7 @ 162.92
puzzled by EURNOK going 1.4% up today in addition to yesterday's move up
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It's the usual story...

Sympathy with Sweden (esp since the housing mkt "correction" might be a common theme between the two), but, more broadly, a washout of various panicked tourists at the slightest hint of things going as little pear-shaped. Probably suggests that EUR/Scandi shorts represent a pretty crowded theme.
 
Yep, but saw no catalyst today except perhaps lagged reaction to yesterday's SEB and Handelsbank CEO comments. Yesterday NOK seems to have overreacted too. NOKSEK moved less than EURNOK on Swedish CPI, so more than 50% pass-through without nok 2y moving and oil relatively stable in those hours. I think on previous CPI occasions pass-through was lower.

btw, do you know anything about theory of NOKSEK going up in q4 on liquidity issues? Nordea made such suggestions a few months ago. I looked at around 15 years of data and did not really find that it is the case.
 
macro_paper said:
Yep, but saw no catalyst today except perhaps lagged reaction to yesterday's SEB and Handelsbank CEO comments. Yesterday NOK seems to have overreacted too. NOKSEK moved less than EURNOK on Swedish CPI, so more than 50% pass-through without nok 2y moving and oil relatively stable in those hours. I think on previous CPI occasions pass-through was lower.

btw, do you know anything about theory of NOKSEK going up in q4 on liquidity issues? Nordea made such suggestions a few months ago. I looked at around 15 years of data and did not really find that it is the case.
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IMHO, the various noises in NOKSEK are mostly about crude (doesn't make the moves sensible, I'd argue, but still...). The drop yesterday looked like it coincided with the move lower in Brent. I agree that the move today didn't make a lot of sense.

No, I have not heard this theory before. To be fair, it does look like there might be something to it, at least based on the few recent years. However, it could well be totally spurious.
 
Let’s follow up on Turkish lira. Last look at it in early September coincided with bottom in USDTRY around 3.40 and now it’s climbed again to 3.88. Effective bank funding rate is still at 12% and inflation accelerated from 10.7% headline, 10.1% core and 9.40% services in August to 11.9% headline, 11.8% core and 9.6% services in October. Econ indicators hint at somewhat slower growth but still a lot better than in Q1. Central bank is starting FX interventions this week by selling 600m USD a week. Last week Erdogan got explicit about central bank independence being a cause of high rates and high inflation.

Term structure doesn’t look as stupidly priced as it looked in September but I am still not sure if it should be inverted. Two-year government bond yield has increased bit more than 200 bps to 13.4% (above 12% effective bank funding rate), so cuts are probably no longer priced – though I don’t have access to data for instruments with more granular short-end.

Government 2s5 inversed further from around -40 to -65, so market seems optimistic that there are limits to how long inflation so high can stay before yields fall again. November expectation survey confirms that with 1-year ahead CPI distribution around 8.5-9%. It’s a good question how persistent inflation will be if central bank neither fights inflation to the end nor starts destructive activities that later become an example of hyperinflation. If inflation is persistent and central bank does nothing, will 5-year yields go even higher or will there be a cap to how much 5-year can decouple from overnight rates and savers opting to switch to USD instead?

An easier approach is to look at what happened in Mexico and South Africa in the same period. 2-year swap rates went up there in the same period, but 2s5 got steeper. Central banks there also seem more independent than TCMB right now. I suppose that there is some space for 5-year to go even higher in Turkey.

Lira reaction to higher yields has been smaller than usually in the past few weeks, so coupled with equity fall over two weeks and my belief that rise in yields is not yet over, long USDTRY to 4.00 makes sense. I want to see if this week lira gets a boost from last week’s strong EMFX performance. The size of the move since Sep (+14%) is also bit worrisome that it’s too late to short it.
 
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I was surprised about the Friday’s ZAR 1.7% sell-off on rating downgrade. Given its recent underperformance, political turmoil and a Fitch junk downgrade earlier this year, I thought that markets had it priced in.

Overall in past four weeks portfolio is down more than 2.5%, with more than 0.5% losses on EURNOK, EURUSD shorts, WN-UXY and EDU1-EDU2 steepeners.

Shorting BA M9 doesn’t look attractive anymore (entered at 214 bps, now 200 bps). Red-white was too flat in mid-sep but as nearby hikes got priced out its steepened somewhat. In hindsight should have done a spread to gain 13 bps, not outright to lose 14 bps. CAD looks cheapish at 1.27 as it’s ignored the past 10 usd gains in oil. NAFTA talks are failing, so curious if there is some downside in CAD if more bad headlines come out.

Here’s also an update on Gold/KRW, JPY/KRW. Gold/KRW has gone down almost as steeply as the number of ballistic launches in the past month. I don’t know how to balance geopolitical risks (that everyone talks but does nothing about) against an MP board member calling for a hike, alleged reconciliation with China (that bothered many board members) and improving econ data (for some reason the Markit PMI figure is stuck at 50 despite other indicators getting stronger). It's not yet time to short KRW.
uc

uc
 
closed ER z7-z8-z9 @ 100.33, 100.26, 99.995
closed 22 ER Z0/ -4 bund Z7 @ 99.69, 162.93
rolled -1 Gilt/ +1 bund from Z7 to H8 @ 125.34 ->124.41, 162.93->162.63
 
Reflecting on closed trades. ER Z7-Z8-Z9 worked quite well. Entered it on 13/03/2017 @ -4.5 (+22 Z7-Z8 and +26.5 Z8-Z9) with the idea that either ECB prepares to hike in 2018 and scares the markets about 2019 or idea of 2018 hiking dies out with some prospect of 2019 hikes surviving. The latter happened. Exit it now @ -0.195 (+7 Z7-Z8 and +26.5 Z8-Z9). Contribution looks interesting. Ex-ante roll-down was around 0 bps, but out of 15 bps only 8.5 bps came from constant maturity reshape. Realized roll-down was positive as by April M7, U7, Z7 got almost totally flat and the Z7 short no longer incurred negative roll-down.

Shorting bunds against position in ER Z0 didn't work out. Entered it on 20/07/2017 and rolled the bund on 06/09/2017. Cash bund outperformed 10 year swap by 7 bps but my construction lost over 13 bps.

Roll-down from ER Z0 cushioned underperformance of second blue contract against the 10 year swap (13 bps of roll-down more than compensated the 8 bps underperformance when 10 year moved 11 bps down and second blue 3 bps). It's not clear why 2027 bund fell 18 bps in yield while futures yields fell 29 bps. I didn't check the implied repo but even a fairly negative rate of -150 bps doesn't explain more than 5 bps out of 11 bps gap. Desynchronization of futures and cash timestamps maybe.

Next time better use bobl, do a more complete hedge, not discard implied repo as insignificant detail and do proper carry calculation.

uc
 
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