Cross Market Analysis

[AdrianWS]

Hello!

Introduction to myself, I'm a sell-side strat (Macro, rates & FX) and while I have to operate under a pseudonym I can comment and discuss anything worth talking about. I'm UK based btw.

A few things first, This thread will hopefully be an interesting discussion from a macro perspective on mostly FX (hence thread area) but also Rates/Volatility (hence the title)

Something I can offer is being added to my mailing list for Bank research, absolutely free of course. I see websites charging for access and I hate it, so if you want bank research just ask me and msg me your email

I hope that this thread can become something worth while, but lets see.

anyone is welcome to comment and say hi!

 

[AdrianWS]

So a few charts that I'm watching at the moment

1st is EURUSD vs 1Y implied yield. Recent movements have caused the market (not just 1Y, but fwd starters and x-ccy bs to widen in the USD's favour as shown)

This is nominal yield, and doesn't show the full picture as USD inflation swaps have been bid last few weeks. but definitely worthy of note.

 

[AdrianWS]

Here is another for the AUDUSD.

I've modelled the AUDUSD against;

-2Y implied yields
-US 10YY
-3M Implied Yield

(model code is 0.8825-(0.0005*(AUD 2 year yield))-(0.0677*US 10 YY)-(0.0012*3M AUD IV)

What we've seen in the past few weeks is a decent divergence (as shown by histogram on pane 2)

my model sees 0.90 as medium term fair value.

 

[AdrianWS]

This is a test post to see if Sell side notes can be uploaded

Some barclays / Goldman / BNP P notes if it works

*seems like only barclays uploaded properly*

as this post proves to me, much easier to email out to anyone that wants them

 

[counter_violent]

How do,

Can see the rational for Eur weakness across the board and especially given the economic / political climate and rising voices of dissent, but not convinced by the Aud Usd analysis target of 90.00. I can easily see 97.00-98.00 before yr end.



Are these bank reports in different formats? If they were all PDF, you should be able to upload them.

 

[AdrianWS]

How do,

Can see the rational for Eur weakness across the board and especially given the economic / political climate and rising voices of dissent, but not convinced by the Aud Usd analysis target of 90.00. I can easily see 97.00-98.00 before yr end.

Are these bank reports in different formats? If they were all PDF, you should be able to upload them.

afternoon,

very quick and crude quant model for the AUDUSD! much more analysis and discussion needed ofc

and I'll have another go at uploading a bunch of them... thinking about it, it may be file size limitations or something.

 

[AdrianWS]

2nd attempt!

*seems like file size issue, may have to do one at a time, or use drop box*

feck it, Dropbox it is

BNP P weekly FX - https://www.dropbox.com/s/rp18zivhfiag6ve/Global_FX_Plus_-_03_July_2014.pdf

Goldman Sachs weekly technicals - https://www.dropbox.com/s/lp2uommsdprizab/téléchargement (3) (6).pdf

BAML - note on ECB - https://www.dropbox.com/s/acjudxnufhzw6w5/11402141.pdf

Credit suisse Chart pack - https://www.dropbox.com/s/ja1z5qozcb5oh64/doc40048888View.pdf

Barcs tech note - https://www.dropbox.com/s/kje0zi3vb...s_US_Rates_A_bearish_lurch_though_no_stro.pdf



*edit

Like said in intro, I can add anyone to a mailing list for this crap... I hate to see people pay for it, so if I can give out for free I'm happy

 

[counter_violent]

2nd attempt!

*seems like file size issue, may have to do one at a time, or use drop box*

feck it, Dropbox it is

BNP P weekly FX - https://www.dropbox.com/s/rp18zivhfiag6ve/Global_FX_Plus_-_03_July_2014.pdf

Goldman Sachs weekly technicals - https://www.dropbox.com/s/lp2uommsdprizab/téléchargement (3) (6).pdf

BAML - note on ECB - https://www.dropbox.com/s/acjudxnufhzw6w5/11402141.pdf

Credit suisse Chart pack - https://www.dropbox.com/s/ja1z5qozcb5oh64/doc40048888View.pdf

Barcs tech note - https://www.dropbox.com/s/kje0zi3vb...s_US_Rates_A_bearish_lurch_though_no_stro.pdf



*edit

Like said in intro, I can add anyone to a mailing list for this crap... I hate to see people pay for it, so if I can give out for free I'm happy

These reports are always interesting.

cheers.

 

[AdrianWS]

These reports are always interesting.

cheers.

Welcome

regarding the gold/AUD chart. There is for sure a strong relationship, but I think the causal link between them is US rates;

Gold has a strong tendency to trade with close ties to US TIPS, likewise, the AUDUSD is very closely correlated to the middle of the US rate curve.

it is true to say that gold is an important export for AUS (blue dots on map) but terms of trade and commod prices have been very insensitive to AUDUSD (and vice versa, judged by rolling R^2s)

So I think it comes down to where the US rates go frankly. Another run toward 240 on the 10s could (and most likely will) see 0.97+, but 240 is less likely with CESI ticking up on better Q2/Q3 data.

 

[AdrianWS]

my most bullish go-to chart for the AUDUSD is that of considering it as an EM proxy or a risk proxy (which are sizeable assumptions)

Chart shows the AUDUSD vs the CDX emerging market - IG 5 year CDS spread.

In other words, the risk premia of the emerging markets over "safety"

Generally correlated well with the AUDUSD, but so far this year has pushed quite a bit higher (well tighter, but scale is inverted) its 180 vs 260.

2nd chart is the same thing just zoomed in a bit... bit of price action divergence recently.

 

[Babson.Summary]

[email protected]

Thanks

 

[AdrianWS]

Had a few people request to go on the mailing list and that's great!

Just to say, its not just FX notes, but Interest rates, Equity, Commodities and economics from a variety of different places.

 

[AdrianWS]

Hi Adrian, great to see some institutional presence on this forum, and good choice of thread topic (although frankly your posts are gonna go way over most people's heads here ).

I have an interest in FX amongst other things. One of the key themes that I've been dwelling on has been this current dearth of volatility - a recent chart of Euro implied vol for example is not a pretty picture. I've heard the usual reasons - ranging from the low interest rate environment to upheavals on fx dealing desks due to regulatory investigations. Obviously it's hurting FICC & broker revenues, so not great from the institutional side, and as for retail side - let's just say they're losing even more money that usual (if such a thing were possible). As you know better than me, vol is mean-reverting in the longer term, but there's usually a catalyst that causes that change. Wonder if/what/when things change... What are your thoughts?

Vol is a particularly interesting point... I've attached a chart of 1 month implied volatility across the G10 currencies (EUR 1 month is even lower!)

and while it is mean reverting, it can take a long time. and its not going to rise back towards 10.8 (10 year mean) until realized rises. which right now does not seem likely.

When implieds are low, there are some clear themes, long carry and high leverage (chart is vol inverted vs NZD). Small unwinds in this will cause those short vega / gamma to flip fast and demand downside protection. And then maybe realized and implied vol rises, but that seems at the very least the other side of the summer.

regarding FICC desks etc, our one is doing "ok" relatively, but its still poor. revenues likely down 20% y/y and with spot FX desks making a mere $4 per million traded, vol really needs to pick up for these desks to survive. A good friend who leads the Nomura spot desk reckon if vol is this low at xmas, 50% of the "traders" will have to be fired... sad times.

 

[AdrianWS]

Yes, I was previously quite active trading cash fx, however I've now taken to chewing crushed glass as it's less painful I agree with your assessment though, this vol compression could be with us for some time yet. If tapering continues as planned, let's see what the Autumn brings...

Heard similar re: BarCap wrt FICC - think their rates desk suffered some. Not the best of times.

Quick question, and obviously understand if you don't want to answer or give detail, but do you run risk in your role?

I primarily write / advise clients regarding strategy... but I do run a "small" portfolio... its more of a CV than anything, but as I'm not *that* high up, my risk taking is quite limited as you could understand, especially in these times!

 

[counter_violent]

Q1) Related to the volatility discussion. Do you have any charting or figs showing volatility versus trading volumes?
I have this niggling feeling that volumes traded may not have dropped quite as much as the volatility (price ranges)

Q2) Just an idea, if more and more trading is done by bots, would you expect volatility to be more smoothed out, less in the way of price extensions?

Q3) In an abnormal market (prices going a bit haywire for no discernible reason), would it be true to say that a lot of these algo traders would be pulled until trading activity returns to normal? (algos turned off, creating price vacuums, where large illiquid moves might occur, like the flash crash ! )

 

[AdrianWS]

Q1) Related to the volatility discussion. Do you have any charting or figs showing volatility versus trading volumes?
I have this niggling feeling that volumes traded may not have dropped quite as much as the volatility (price ranges)

Q2) Just an idea, if more and more trading is done by bots, would you expect volatility to be more smoothed out, less in the way of price extensions?

Q3) In an abnormal market (prices going a bit haywire for no discernible reason), would it be true to say that a lot of these algo traders would be pulled until trading activity returns to normal? (algos turned off, creating price vacuums, where large illiquid moves might occur, like the flash crash ! )

1) regarding FX, I don't have any charts to prove it, but volumes have definitely dropped this year... trust me on that one. But still, volumes are much higher on average than they were, 5 / 10 years ago so that is something. Just spreads are so much tighter as such desks make less money market making.

UST volume has also been pretty light, and of course equities have. One area that is strong, is that of FX options. A nicely growing sector (up like 15% y/y) and desks are loving that (because of wide spreads). Still minimal volume compares to forwards/spot, but its something.

2) I'm no algo expert, but I consider their activites to be no different to a human player, just quicker. After all they were programmed by a person. So I think there is no real impact on realized volatility, if anything, they could cause greater spikes in my opinion, but not much in it.

3) firstly, there is always a reason for prices changing, its just the reason might not be clear. And we have to remember what algos are... They don't really speculate, they just market make. In terms of volume, systematic trading algos are quite small for FX, and so some have been turned off (trend following ones) but overall, algos are still doing their job.

 

[AdrianWS]

USDJPY and nikkei diverging, should be interesting with a large typhoon heading to japanese mainland. maybe some vol... tail risk not at all priced into the markets.

 

[counter_violent]

I like the way this thread is developing.
Interesting to see how you guys work.

 

[AdrianWS]

On the chance that something does materialize in US equity and we drop a bit further... or any repatriation flow from the typhoon highlighted earlier then USDJPY downside is VERY cheap here.

a 3 week 101 put costs a mere 25 pips. heavy stops in 101.20/00 which are vulnerable.

Risk reversal very, and suspiciously, unmoved.