macro paper trading

No good ideas in my mind but I have not posted for a while so here’s a dull overview of some central banks for the week ahead.

Fed reaction will probably be dovish this week. The market pricing has caught up with the Fed projections since the last meeting. I find it unlikely that 2018 rate projections will be adjusted upward from three hikes given the strong dissent within the Fed and almost no members suggesting they want four hikes. Econ data hasn’t been strong either.

With BoE I wanna see inflation numbers and probably retail. Moderation in inflation would be headline no higher than 2.9% and core no higher than 2.6%. This is also consistent with Boe comment last meeting that inflation would peak in October. If this indeed the case, I’d expect that they will comment that inflation-growth trade-off has improved. Retail sales and construction output were poor in October. Services PMI isn’t that strong. Wage growth going below 2.4% would help that.

USDTRY has moved back to < 3.85 from 3.95. I am skeptical that TCMB will tighten despite inflation running further away from the target because a hike would undermine Erdogan’s words that interest rates need to go down and TCMB independence need to be questioned if rates aren’t going down. On the other hand, Erdogan could have a second thought as lira losing more than half its value in 2001 was one of the reasons his party came to power. It’s probably better to wait to see what TCMB do.

macro_paper said:
rolled earlier today:
RXZ7->RXH8 @ 0.62
IKZ7->IKH8 @ -1.77
More...
That’s -0.25 for RX. +0.62 would be for bobl. Again my poor attention to what contracts I am looking at.
 
Euribor futures are misbehaving again. December 19 is pricing almost 1.75 hikes. I am too pessimistic on EZ inflation to price that much. There is no progress on service inflation whatsoever. Core inflation has been subdued in past two months but the average is making even more noticeable slowdown in Spain and Italy. Labour costs have been strong in Germany, France and Italy but the latest print shows the acceleration in Italy has stopped. Spain is still doing poorly.

U9-U0-U1 curvature looks wrong too. Given the poor data and dovish ECB, U9-U0 should not price more than U0-U1. The rolldown is currently positive.

Oil market seems to have underreacted to announcement that Forties pipeline will be back online in early Jan. Brent's up more than 1.5 USD on 90k cuts in Libya, even though Forties is more than 450k capacity.

Betting against KRW looks interesting. Minutes for one of the previous meetings showed that many board members wanted clarity on Chinese sanctions. The Chinese sanctions were taken off. Inflation was running above 2%. A hike came in late November. Now inflation has dropped to 1.3% yoy, core is failing to accelerate. Last week china reimposed sanctions on the tourist sector. Thus we had an unwind of factors that pushed the board toward a hike, yet KRW did not react.
 
p/l has been around zero for the bTP-bund widener in futures from position open on 15/11/2017. It doesn't look too narrow against credit anymore (credit spreads narrowed and some election headlines helped btp-bund). Renzi's case looks hopeless. So far the headlines have focused that he's doing poorly. Let's see what happens if/when Berlusconi is mentioned more frequently.
 
increasing size of gilt-bund widening from 1 to 3.
-2 G H8 @ 125.05
+2 RX H8 @ 161.80

getting out of EURCZK. Central bank no longer assesses the balance of risks as to the upside, so might disappoint on more hikes. Some weird price moves over last two days. Probably something year-end related.
CZK leg: -250k USDCZK @ 21.45
EUR leg: +2 6E H8 @ 1.1987

+7 ER Z9 @ 99.90
 
Q4 has been a bummer with -2.3% at -0.97 Sharpe. Annual performance with adjustment for change in base currency is -2.14% (+1.45% without the adjustment but going forward I will use -2.14% for consistency). In Q4 no idea worked well enough to offset losses for any of three largest losers. Those were UXY-WN steepener, shorting EURNOK, ED U1-U2 widening.

- UXY-WN steepener was an idea that it failed to widen despite the Fed portfolio wind down and higher deficits, but this lost money on bear flattening with Fed more firmly priced in. Narrowed around 17 bps in Q4.
- Expectation that NOK will respond to higher oil prices as well as being previously oversold relative to rate differentials., up by almost 5% in Q4.
- ED U1-U2. This one is down from 16 bps to 7 bps now and also a casualty of bear flattening. It’s now at early 2006 levels where the Fed was almost done hiking.

Daily PNL correlation against ran at +0.24 against SPX, +0.19 against the 10y rate. R^2 from regressing on both is 6%.

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Missed the exit moment in BTP-bund widener. Entered at 1.60% with hopes Berlusconi headlines would widen it. The highest point was 1.86%, but could have got out at around 1.7% when both Berlusconi and di Maio announced that they no longer believed a referendum was needed.
uc



In Hungary central bank got the short end of the stick in their IRS tender. They tendered to receive in 35b HUF of 5y IRS @ 0.76% and 40b 10y IRS @ 1.46% (6bps below prev day close). Next day 5 and 10 year rates were up 27 bps and 45 bps.
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Need to close BA M9 before the NAFTA headlines are coming in. CAD is looking cheap but given the rumours that Canadian government prepared for a NAFTA exit it’s not looking like a good entry point.

The ECB accounts dropped ER Z9 by some 6-8 bps, so the actual change of language will probably increase yields some more. Looking to add more as pricing 2 hikes by end 2019 is too much given that labour costs are going nowhere in the periphery.
 
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