The optimists are in control. Economic data continues to look good and I don’t think tomorrow’s Retail Sales number really matters.
Ed Tufte proclaimed this as one of the worst graphics ever.
Tufte is a Yale professor specializing in the visual presentation of quantitative information. I attended his one-day course in New Haven this past weekend and will write about if in a special am/FX on Friday.
Short CADJPY at 108.90
Stop loss 110.26
Long 10DEC EURMXN
18.70/18.20 put spread
~50bps EUR
off 19.16 spot
November 14, 2023
The optimists have been mostly correct on inflation as oil prices and used car prices have fallen back to where they were two years ago. Meanwhile, OER is operating as expected with a 12-month lag to the real world and will continue to trend lower for the next 10 months or so, at least.
Average hourly earnings are still growing above historical trend but at 4.1% YoY AHE, we’re at the lowest reading since March 2020. With so many disinflationary forces (including softening labor markets in the US and Canada) it feels to me the market will run with this number and even a strong Retail Sales release tomorrow cannot derail the soft landing / 1995 vibes.
With the ZEW expectations index picking up for the third month in a row (now in positive territory), copper making a nice base on the critical 3.54 level, NASDAQ on fire, positioning still pretty clean, many strategists still bearish, and seasonality super bullish… The standard year end rally should continue. A strong retail sales number tomorrow does nothing for Fed policy but reinforces the soft landing story and therefore I don’t think this setup will be derailed whether the figure is strong or weak.
Note that the Trader Almanac shows a strong bullish seasonal for GBPUSD starting 16NOV and running until 16DEC and you can see in the Positioning Report (below) that the huge CFTC long in GBPUSD is now a small short. Lower USD and stronger EM should be the path of least resistance for the next few weeks. GBPUSD is tickling the 200-day moving averages.
This data is good for my EURMXN short, though if you have the trade in cash you might consider stripping the EUR leg as we could see a big EURUSD rally from here. Also, keep an eye on USDMXN near 17.00 as that is where we had the vicious reversal after the Banxico altered the hedging program.
By the way, you can Order the 2024 Almanac here.
The paper linked below (first brought to my attention by Saeed Amen) is quite interesting and shows how efficient markets work. It also is a good argument for not sharing your findings in academic journals if you plan on making money trading those ideas. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4599758
Abstract: Using real-time data, we show that currency excess return predictability is in part due to mispricing. First, the risk-adjusted profitability of systematic currency trading strategies decreases after dissemination of the underlying academic research, suggesting that market participants learn about mispricing from publications.
Moreover, the decline is greater for strategies with larger in-sample profits and lower arbitrage costs. Second, the effect of comprehensive risk adjustments on trading profits is limited, and signal ranks and alphas decay quickly. The finding that analysts’ forecasts are inconsistent with currency predictors implies that investors’ trading contributes to mispricing and suggests biased expectations as a possible explanation.
Elections!
A good article by Claudia Sahm:
https://stayathomemacro.substack.com/p/why-might-this-time-be-different
Have a beautifully-designed day.
The Spectra FX Positioning and Momentum Report
Hi. Welcome to this week’s report. The big story in positioning is the short JPY trade. Specs have spent most of 2023 playing for US recession and/or BOJ normalization and lower USDJPY, even as CTAs have traded USDJPY from the long side because of trend and carry. Now, everyone is on the same side of the boat as the feeling is that the speed of the rally (slow) takes the MOF out of play, even as we near the 151.95 level where they intervened last time. Most USDJPY intervention reflects MOF concern about a combination of speed and level and while the level is probably a concern for them, the speed of the rally has been glacial. Still, with lower yields across the board, Finance Minister Kanda could reasonably argue that FX does not currently reflect fundamentals and therefore there remains meaningful intervention risk despite the slow speed of travel.
1. CFTC positioning has been a useful guide for GBPUSD as it traded heavy on the back of the extreme CFTC long throughout the summer and now trades better bid with the positioning headwind lifted. The CFTC position is small short now and doesn’t offer a meaningful predictive signal at this point.
2. As mentioned in the intro, USDJPY positioning is at an extreme long after running mixed for most of this year. Specs have joined CTAs in buying USDJPY calls and call spreads and trading long cash. This sets up for a huge impact if the MOF were to get involved and raises some questions about how long the JPY can stay weak when global yields are falling significantly, and the position is heavily-owned. Positioning is now a big risk for JPY shorts as every segment is involved.
—
That’s this week’s report. Thank you for reading.
Bad graphics are like:
A sort of almost unbelievably large move in Brazil. Plus: Short CADJPY.
NZD has a bunch of bullish kickers: Election, seasonality, and inflation
