No Man's Land

The weekend has brought us little new. APEC members have once again promised not to do what they are currently doing and most likely won't stop doing, effectively turning the current FX Wars into the FX Cold Wars. Expect bags of used notes to be exchanged in shady Vienna bars, and billions of USDs to be found in bushes in lonely city parks. Smiley's people indeed.

What is interesting is the market's spin on the US jobless figures. The number of blogs and commentators downplaying any excitement of a growing upward trend in US data adds weight to our suspicions that there are an awful lot of people in denial of anything that may damage their short USD possies or their short Equity dreams or their US down the Swannee ideals. This is all looking like a perfect set up for another explosive equity up move.

The Euro data continues to look like a roll over (see chart below, Citi Economic Surprise indices: orange - Eurozone, white - US), while the US data is re-accelerating and the market is happily kicking the Euro's butt around the yard on the peripheral concerns But the move in Euro related to the post-QE unveiling of the peripheral mess feels as though it is now priced in. In other words, we will need new bad news to get this moving again...

...We are all watching for the hair line cracks in Spain to open up again as the Zapetero denial policy cant hold it together for ever but so far Spain has only leaked wider, but it's not trading like Ireland or Portugal (see chart below, 10yr Bund-spreads: white - Greece, orange - Ireland, yellow - Portugal, pink - Spain).

But the other function for Euro is what happens in Asia. China appears to have added 5bp to its 1 yr bills today, but what if they do another small pseudo move in FX to appease G20? We think that differential competitiveness matters more to Asia than purely vs US as they are frightened of losing export market share to their regional neighbours. So where China leads, the rest will follow. And less USD/Asia "Cold War" buying means less EUR/USD buying. So really, putting it all together, as we sit here in no man's land between APEC and G20, it looks like short Euro vs long risk assets is the trade for now. Looking back to the first few months of this year, that was pretty much how the market traded the Eurozone crisis to start with: growth in the US was beating expectations and Asia was going gangbusters. In response, punters used Euros to fund their long-EM carry trades. It was only when the moves in Peripherals got very ugly and spilled over to Spain that markets got ugly. So, if Spain does crack, and it morphs into a general "risk off" move, we buy USD and sell those Risk Assets effectively leaving us short EUR/USD... Phew...

Oh and one final point, we have lifted the "comments" restrictions to allow anonymous non registered contributors to return to the fun. We are hoping that US health care issues are far enough behind not to have it descend into chaos again.