A little bit of everything today. Microstructure, macro, and deep thoughts.
And once again that familiar
numbing beat of routine rolling
along its familiar tracks.
Commuter trains loading and
unloading passengers…
sleepwalkers, shoppers, solicitors,
the ambitious and the hopeless,
the contented and the wretched…
human electrons shuffling through
the circuitry of civilization,
enacting corporate spreadsheets
and other such things.
Long 07FEB EURGBP call
spread 0.8870/0.8920 risking
22 GBP bps to make 50
Spot ref. 0.8850
January 24, 2023
There was a large buyer of AUDUSD yesterday at the 4pm London fix and there is a guess in the market that the trade was a dividend payment. In case you are not an FX person: 11am NY / 4pm LDN is the climax of the FX trading day. Many hedgers use that window (which is called the WMR Fix) to benchmark and execute large trades.
The biggest user of the WMR fix is real money (hedgers of stocks and bonds), but corporations also use it as a benchmark for payments such as foreign dividends. The large miners are particularly well-known for their large dividends and concomitant hedging flows. Unrelated fact: BHP pays a 10% dividend. Did you know that? Juicy!
Here is the average distribution of EURUSD volume by time of day:
First row of x-axis label is GMT, second row is NYC time
Most currencies (including AUDUSD) follow a similar pattern, though USDJPY sees its largest volume spike at the Tokyo fix (9:55am Tokyo time). The barbs you see in that chart are 1) London open, 2) US economic data, 3) options expiry, and 4) WMR Fix.
Here is a 1-minute chart of AUDUSD yesterday. It rallied 0.8% in an hour.
Yesterday’s date (23JAN) doesn’t line up with any major dividend payments from the miners (BHP, Rio, etc.) so I’m not so sure what the flow was. But anyway, there is this thing in the market where if there is a massive fix one day, the market gets all edgy the next day, wondering if there’s going to be another one. The reasoning is that extremely large flows are sometimes chunked into multiple days.
For example, if you have 6 billion AUD to buy, you might split it up into three orders of 2 billion each at the WMR Fix, Monday, Tuesday, and Wednesday. I ran a simple study. If AUDUSD rallies more than 0.4% between 10am and 11am today, go long from 10am to 11am tomorrow. Here is the P&L of that strategy. I did it for EURUSD too, just for kicks.
You can see that the 2020 madness created a lot of autocorrelation between WMR fixes, and the same pattern was evident in 2022. Overall, if AUDUSD rallied more than 0.4% on a given day from 10am to 11am, there was a 62% chance it went higher in the 10am to 11am window the next day. Sample size is 94 occurrences back to 2010. But as you can see in the chart, a lot of that win rate is just in the past few years. This points to some mild evidence that there are some very large flows split up into chunks over a few WMR fixes. If you are bearish AUD (or bearish NZD as I am) watch out for a spike to sell into at 11am NY / 4pm LDN.
Out of curiosity, I also ran the strategy of simply going long AUD every day from 10am to 11am, regardless of what happened yesterday. The result looked totally random, but when I plunked all the currencies in there one by one, there was a chart that stood out as mildly interesting. Look at the persistent real money selling of GBPUSD through Brexit.
The bullish EURGBP thesis is alive again after last night’s PMIs. The narrative of a more credible, hawkish ECB coupled with a nervously hiking Bank of England remains valid. There was a huge washout in the trade, obviously, but the 0.9000 target still looks reasonable. Check out this website: https://www.strikecalendar.co.uk/.
02FEB remains the Super Bowl for EURGBP with the ECB and Bank of England meetings back-to-back.
The HDS page for the 2030 JGB is interesting.
BOJ owns 114.76% of the issue. Neat.
HT JJ
Just about every tech stock RSI went >80 yesterday on the hourly charts. Google is particularly interesting as it faces declining ad revenues, multiple investigations (including a new one from the BOJ last night) and the first-ever challenge to its search dominance from GPT-3 and GPT-4 and GPT-5… It closed at $101 yesterday; trading $99.50 premarket.
Humans are resourceful, and that is why Malthusian theories are always wrong. This is wild:
Congratulations to Jon Turek, who is moving from advisory to a buy side role. He is one of the most excellent human beings in the market. Smart guy, nice guy, true professional. Good luck, Jon!
The Weekly Positioning Report is below.
Have a utopian day.
The past week has seen another uptick in USD-bearish sentiment and a significant, but still not yet worrisome increase in USD short positioning. Our franchise has been transacting EURUSD topside, longer-dated AUDUSD calls, and we have seen JPY bulls adding to short USDJPY trades. Soft landing vibes and China reopening continue to dominate as all those trades grind higher. Long copper, long gold, long silver, long European equities, paid ECB, long EM, “say no to US megatech”, and short USD are the popular trades. If you have one or more of these, keep an eye on all the others as possible coalmine canaries.
Here are this week’s positioning and momentum scores:
1. Momentum in lower USD trades remains solid, but the CFTC has decided to reduce a bit of exposure. Specs dealing at Spectra have been focused on AUDUSD topside and have stopped adding to USDJPY downside as the message from the BOJ becomes more confusing and price has stalled again just above the key 125/126 target zone. 127.23 is the low so far as the BOJ Governor nomination remains a few weeks away.
2. GBP has outperformed as sentiment turns from bearish to neutral and even bullish in spots. Three FX strategists at large banks put out bullish GBP recommendations last week as price drives news. Suddenly people are wondering if there is more risk premium to come out post-Truss. That seems a little bit absurd at 1.2400. Not that the risk premium is knowable, just that that’s the argument for bullish GBP after a 19-big-figure bounce.
3. Overall risk asset sentiment has ratcheted from gloomy in December to somewhat sunny now and it’s up to the data and the central banks to either ratify the more optimistic view, or not. Labor markets remain the lynchpin assumption in all forecasts. Soft landing assumes labor market is OK and hard recession forecast assumes labor market is about to crack. US Initial Claims sub-200k and stonking jobs data in Canada and the UK have reaffirmed that labor markets are anything but broken at this point.
Financial conditions have eased substantially and are now as loose as they were in February 2022. This is not just about stocks going up, credit spreads and some other contributors to financial conditions are showing even more optimism than equity markets.
4. China reopening remains the dominant theme, even with China out. It’s tricky with the real economics benefits of a reopening not likely to appear until Q2 but for now specs and real money are happy to accumulate AUD and other China reflation proxies based on the logical assumption that China growth will see a huge surge soon.
5. Very few meaningful pullbacks in euro as it has now marched from 1.00 in mid-NOV to 1.09 on the back of rising China growth expectations and a more hawkish and more credible ECB. Lagarde is doing her best to silence the sporadic chirping from the doves. There is a large pile of 27JAN expiry euro options between 1.08 and 1.09.
Thanks for reading.
https://nickbostrom.com/utopia
This was written in 2006, but I had not seen it until yesterday.
It is an interesting piece of philosophy and creative writing by an interesting dude.
2785 words, about a 10-minute read.
Optimists only, please.
The AI imagines:
“A futuristic spreadsheet xls”
This piece is mostly for people who are interested in backtesting
