It’s been a tough week in macro land. USDJPY and Euribor, popular macro trades du jour, broadly bucked consensus expectations. Apparently Euribor futures daily volume hit the highest level in history, despite the fact that LTRO repayments were only somewhat higher than expected. Positioning & sentiment continues to be the main drivers in a world awash with money.
Moving on, I wanted to look at EURCHF today. Long time readers know that just over a year ago, I espoused a long EURCHF position that was ultimately unprofitable. At the risk of getting burned twice, I think it’s worth looking at again. As more intelligent people have pointed out, there are a lot of political issues at stake here, (country default, ECB backstops, taxes…) which are ultimately difficult to handicap. But on a shorter term basis, perhaps there is a trade here.
The main thing that has changed between now and when I initially looked at EURCHF is that sovereign default risks have receded significantly. Furthermore, given the ECB backstop, those *perceived* risks are likely to continue receding in the near term. (see chart below) This suggests that the wealthy Italians & Spaniards may who initially moved their money to Swiss Francs may become more comfortable with moving part of their assets back into Euros. Indeed, 4Q data on European bank deposits has shown an increase in Spanish bank deposits for the first time in many months. Interestingly, Denmark’s central bank also hiked rates yesterday, possibly as a result of a reversal of safe haven flows.
EUR denominated risk assets have all rallied strongly since last summer, but EURCHF has just started to move. There is a long term resistance area around 1.2450 that could be in the process of giving way:
Most brokerage reports I’ve seen suggests a fairly conservative consensus on this cross, with many concurring that while EURCHF is cheap, there is not a foreseeable catalyst and so it probably won’t move. A continuation of this move so far, along with some CTA momentum chasing, could change that.
Separately, technical oscillators suggest that the S&P is quite overbought. The 14 day RSI, for example, is above 74, just below the 75 readings that conventional wisdom suggests is a sell. However, conventional wisdom may have it wrong. Over the past 3 years, only once has the first instance of a high RSI reading marked a substantial market top. The other 4 instances actually proceeded positive returns over the subsequent weeks:
- ECB reported that 278 banks will repay €137.2bn of the 3-year LTRO borrowing next week. This compares to consensus expectations of 84bn or so. The next LTRO repayment announcement is at the end of February.
- German IFO improved to 104.2 vs 103 exp and 102.4 prev
- US New Home Sales declined to 369k vs 385k exp and 377k prev
- Canada Core CPI declined to 1.1% YoY in Dec vs 1.4% exp and 1.2% prev.
- Merkel: "I don’t want to say that I look toward Japan completely without concern at the moment," she said, adding, "In Germany, we believe that central banks are not there to clean up bad policy decisions and a lack of competitiveness."
- BoJ minutes showed that several members of the board were against cutting the IOER to zero since it would 1) cause a decline in liquidity in the money market, 2) squeeze profits for financial institutions, 3) make achieving the outstanding target of the APP difficult, and 4) the impact on FX-markets from a cut would be short-lived.
- Mon: US DGO, Pending Home Sales, South Korea Business Survey
- Tue: US Home Price Index, Consumer Confidence,
- Wed: EU Consumer Confidence, US ADP Employment, FOMC
- Thu: ECB LTRO payment begins