G3 Recap 11-02-10

Main Items:

  • China told its banks to ask for faster repayment of local Gov’t infrastructure loans on worries current debt terms leave the banks with too much risk. Bloomberg
  • Moody’s says a default of a Eurozone sovereign unlikely – Moody’s says that countries like Greece, Portugal, and Ireland should be able to avoid default b/c of strong domestic investor bases that will buy their government’s debt. FT Right, just like house prices won’t go down because there will always be people to buy houses. EU Spreads have been quietly widening again over the past week. Portugal spreads are only about 30bps from its Sept wides.


  • RBA hiked 25bps overnight vs expectations of unchanged. Its outlook remains unchanged and assumes some further tightening down the road.
  • India also hiked, but the move was expected. The statement suggests that it is done for now, even though inflation is running well ahead of its target.


  • EURCHF has been a popular short for much of the year. EU sovereign risk was probably the single biggest driver, as capital flows overwhelmed SNB intervention efforts. The cross traded down to 14% cheap vs the PPP measure, a historical extreme. Even after the 2 month bounce, it is still trading quite cheap vs PPP:

    The strengthening of CHF vs the EUR, on top of the EUR strength vs USD, has made CHF one of the best performing currencies vs the USD since May, reducing its competitiveness by almost 20%:

    So from a valuation perspective, there appears to a good case to be long.
    However, the original catalyst for the move is still looming. PIGS CDS, weighted using GDP, remains wide, and recent comments from Greek officials have been far from soothing.

    And people appear to have started playing a continuation of that trend via the EURCHF skew:

    EURCHF is only here due to the PIGS risk premium. As a result, one may want to consider the probability of further CDS widening in the immediate future. This 2 month bounce in EURCHF despite a broadly stable PIGS CDS levels suggest that much has already been priced in. Both valuations as well as economic momentum appears to favor further upside here, as EU-Swiss IP differentials remain wide:

    This suggests that, in the absence of further PIGS CDS widening, EURCHF can continue to rally.

  • Given that it’s election day, I liked this post:

7 thoughts on “G3 Recap 11-02-10

  1. The EURCHF trade has some pretty big downside risks. The PIIGS can easily produce something unpleasant and it’s quite likely to be in the form of breaking news and fast market reactions, rather than slow CDS appreciation. The idea is nice, but the risk-reward ratio is kind of high, in my opinion.

    BTW, thanks for a very nice blog, it’s pleasure to read you.

  2. Hi Sid – You’re right – the payoff profile looks like being short an option. I agree that it’s probably not the right time/price for the trade. I just wanted to spend some time on EURCHF as I was chatting with another reader recently in the comments section.

    Glad you’re finding the blog interesting!

  3. Evening dude.

    Great blog…..interesting counter argument on the Macro Man site (another great blog!). I’m leaning more towards getting short now that QE’s done and dusted;


    Guess that’s what makes a market!

    All the best, and thanks again for the blog. Always a good read.



  4. Hi Adam –

    Thanks for your comment. I think that at some point, gold will be a good short. I just think that it needs to go parabolic first. Given that the trend still appears to be pretty strong, my own opinion is that I’m supposed to stay long until it goes crazy.

    The effect of QE is not quantifiable, but I feel like for gold it can be quite strong. I feel like you should wait for a confirmation of a turn in the trend before going short. Just my 2c, for whatever they’re worth.


  5. Ah – yes, that makes more sense!

    Yeah, I should’ve clairfied. I’m not advocating going long here, I’m just saying that absent PIGS headlines, EURCHF will be higher. It certainly wasn’t a particularly useful trading recommendation, but I do think that the downside for EURCHF is not was bad as some expect, especially since we can be fairly sure that there will be no defaults for the next 6 months.

    The guys at TMM know their stuff. But there is also risk with shorting EURCHF in the sense that you’re betting on headline risk happening fairly soon, as the reflation wave appears to be lifting everything. I hope their trade works though!


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