The Global View
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The Global View
The Next G-7 May Be All Roar and No Bite.
The last G-7 - which some ebullient observers (ourselves included) dubbed "Plaza II" - caught many by surprise. This time, the market doesn't want to be caught sleeping on the watch as we head towards the Florida g-7 meet on 6-7 February. A number of themes are crystallizing as that date approaches, but the anticipation leading up to this event may provide the bulk of trading opportunity as the meeting itself, and its outcome, may not quench the market's thirst for accurate prediction.
The global theme right now is one of competitive devaluations - the idea that every major currency region in the world wants to have the weakest currency. China and Japan have been the most obvious examples of this - with the USD peg and massive intervention, respectively. The US has been a bit more clever, or at least they think they have been with their "We support a strong USD dollar (but we really mean the opposite)" policy. These warring weak currency camps have left Europe with the role of taking on an "adjustment burden" - as the EUR has strengthened massively against the USD and JPY.
Interestingly, the new ECB leadership doesn't seem to mind the strong EUR, if we are reading Mr. Trichet's rather tight lips correctly. We suspect that Trichet may have some clever and correct ideas about how the strong EUR will force Europe to reform its economy to meet the demands of the competetive global marketplace. But European leaders of the Chirac and Schroeder stripe are hardly as clever, and hardly as likely to do anything but trumpet the competitive devaluation theme from the highest tower, bemoaning the strong Euro's deleterious affect on exports and growth.
The most trusted instrument in the competitive devaluation environment is the downward adjustment of interest rates - and despite the recently low levels of rates, some blocs may feel they still have room to move between current rates and the zero bound. Greenspan, who is clearly in the pocket of the US administration, needs/want to make sure he gets his name on the Federal Reserve Building (named after longest serving Fed Chairman). The Bush administration wants to keep the economy floating into election day - Greenspan may be sharpening his machete for another cut. Most of the other central bank chieftans around the world, with the possible exception of those in Australia, New Zealand, and the UK, are doing likewise.
Now to the upcoming G-7 meeting. Please sit tight because now it gets complicated. I will argue in the spirit of Machiavelli: The fact that the market expects something from this G-7 meeting changes the scenario leading up to the actual meeting.
Last time, remember, no one expected anything and we got fierce JPY reaction. This time, the threat of the meeting will likely make the market position itself ahead of the actual event, so all of the action will occur from now through the next three weeks - and the meeting itself will be mostly a wash. The storm before the calm, if you will.
The best possible outcome of this meeting will be: more movement on the part of China towards a "widening of the band" or the much discussed "repegging" to a basket of currencies. This would generate a need for Japan to do the same. USD/JPY would move to 100-ish on this as their exporters are done buying Yen ahead of the March 31st fiscal year end.
This leaves us with one position: EUR/JPY as the market speculates on further interest rate cuts and a strong Yen outcome to the G-7. I have been buying 129.00 EUR p 2month costs approx. 55 tics... The volatility is cheaper than EURUSD and relatively cheap against actuals. The EUR/JPY option caters for strong EUR and the potential for stronger JPY, plus plays on volatility through adding some duration to it.
Additionally, my broad macro view from here leaves me looking for the following trades:
Long fixed income,
Long volatility in s&p and eur.jpy,
Serious correction of growth potential in the us (and rest of world)
Long corn
Short SEK, as they will need to cut interest rates at least twice in coming months
Short PLN/long MXN...
By Saxo Bank
The last G-7 - which some ebullient observers (ourselves included) dubbed "Plaza II" - caught many by surprise. This time, the market doesn't want to be caught sleeping on the watch as we head towards the Florida g-7 meet on 6-7 February. A number of themes are crystallizing as that date approaches, but the anticipation leading up to this event may provide the bulk of trading opportunity as the meeting itself, and its outcome, may not quench the market's thirst for accurate prediction.
The global theme right now is one of competitive devaluations - the idea that every major currency region in the world wants to have the weakest currency. China and Japan have been the most obvious examples of this - with the USD peg and massive intervention, respectively. The US has been a bit more clever, or at least they think they have been with their "We support a strong USD dollar (but we really mean the opposite)" policy. These warring weak currency camps have left Europe with the role of taking on an "adjustment burden" - as the EUR has strengthened massively against the USD and JPY.
Interestingly, the new ECB leadership doesn't seem to mind the strong EUR, if we are reading Mr. Trichet's rather tight lips correctly. We suspect that Trichet may have some clever and correct ideas about how the strong EUR will force Europe to reform its economy to meet the demands of the competetive global marketplace. But European leaders of the Chirac and Schroeder stripe are hardly as clever, and hardly as likely to do anything but trumpet the competitive devaluation theme from the highest tower, bemoaning the strong Euro's deleterious affect on exports and growth.
The most trusted instrument in the competitive devaluation environment is the downward adjustment of interest rates - and despite the recently low levels of rates, some blocs may feel they still have room to move between current rates and the zero bound. Greenspan, who is clearly in the pocket of the US administration, needs/want to make sure he gets his name on the Federal Reserve Building (named after longest serving Fed Chairman). The Bush administration wants to keep the economy floating into election day - Greenspan may be sharpening his machete for another cut. Most of the other central bank chieftans around the world, with the possible exception of those in Australia, New Zealand, and the UK, are doing likewise.
Now to the upcoming G-7 meeting. Please sit tight because now it gets complicated. I will argue in the spirit of Machiavelli: The fact that the market expects something from this G-7 meeting changes the scenario leading up to the actual meeting.
Last time, remember, no one expected anything and we got fierce JPY reaction. This time, the threat of the meeting will likely make the market position itself ahead of the actual event, so all of the action will occur from now through the next three weeks - and the meeting itself will be mostly a wash. The storm before the calm, if you will.
The best possible outcome of this meeting will be: more movement on the part of China towards a "widening of the band" or the much discussed "repegging" to a basket of currencies. This would generate a need for Japan to do the same. USD/JPY would move to 100-ish on this as their exporters are done buying Yen ahead of the March 31st fiscal year end.
This leaves us with one position: EUR/JPY as the market speculates on further interest rate cuts and a strong Yen outcome to the G-7. I have been buying 129.00 EUR p 2month costs approx. 55 tics... The volatility is cheaper than EURUSD and relatively cheap against actuals. The EUR/JPY option caters for strong EUR and the potential for stronger JPY, plus plays on volatility through adding some duration to it.
Additionally, my broad macro view from here leaves me looking for the following trades:
Long fixed income,
Long volatility in s&p and eur.jpy,
Serious correction of growth potential in the us (and rest of world)
Long corn
Short SEK, as they will need to cut interest rates at least twice in coming months
Short PLN/long MXN...
By Saxo Bank
- Mensagens: 197
- Registado: 10/11/2002 23:04
- Localização: Alentejo
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