Ribbons

February 27, 2024

PDF version

---

Ribbons

I have spent the last week thinking nonstop about tonight’s RBNZ meeting and I’ve been writing about it a fair bit, but unfortunately I have come to the conclusion that there is no currency trade. My base case is that there will be no hike, but Orr will sound hawkish as he makes the case that mission is not yet accomplished. There are plenty of reasons not to hike, foremost is that rates are already restrictive and lags are long and variable.

As is the case with all central banks, the RBNZ policy rate tends to follow 2-year yields. That is, the market hikes and the central bank follows. In cutting cycles, this is not always the case (the central bank often cuts faster and harder than the market).

Here’s the RBNZ Cash Rate (OCR) vs. NZ 2-year yields.

Looking at the 39 rate hikes since the year 2000, exactly zero happened when the 2-year swap yield going into the meeting was lower than the OCR. That is: The RBNZ has never hiked rates when the 2-year yield was below the OCR. See A, B, C, D on the chart and you can observe how yields (black line) were always above the OCR (red line) when they embarked on hiking. Currently, that is not the case.

The RBNZ faces a similar conundrum to other non-US, developed world CB’s: Strong labor market, weak growth, high mortgage rates, vulnerable consumer, sticky inflation. Handicapping this meeting is particularly tricky as the RBNZ is no longer operating under a dual mandate. They are back to just one compass—inflation.

CPI is still very high in NZ, and the tradeable vs. non-tradable details are not encouraging, but due to the lags of tighter policy, it’s pretty easy to argue hike or no hike at this point. The fact that it’s been 89 days since the last RBNZ meeting also adds some randomness as their past policy statements may not reflect their current stance.

Keep in mind that the RBNZ has a process where a vote is allowed if not everyone agrees on the decision. This is rare, but happened in May 2023:

On Wednesday 24 May, the Committee took the decision to vote on the two options. By a majority of five votes to two, the Committee agreed to increase the OCR by 25 basis points from 5.25% to 5.50%. 

No change in rates, with a dissenting vote or two in favor of a hike could be one way the meeting comes across as hawkish. So while I feel strongly that the RBNZ will not hike, I don’t feel strongly that it will end up bearish NZD. So there is no currency trade. If I was forced to do something, I would receive the meeting and be long NZD into it. You don’t get much juice on the rates side with only 20% chance of a hike priced in, though.

---

FX Vol

Fiat currency traders watch cryptocurrency traders with great jealousy right now as we are heading towards depths of trading torpor plumbed only in mid-2007, mid-2014, and late 2019. Those periods were painful, but each was followed by a historic, high-vol trading environment. The 2008 GFC, the 2015 ECB QE trade + China deval, and COVID.

I’m not a huge fan of the saying “stability breeds instability” because it’s kind of tautological. Obviously, stability is not permanent in a complex system. Still, the saying kind of fits here. Keep sane and stay strong. These low-vol regimes do not last forever.

---

Final Thoughts

Have you tried perplexity.ai? I am finding it much better than Google for almost all search applications. I barely use Google now that I am used to perplexity. Thanks AV for telling me about it.

Have a nutty day.

good luck ⇅ be nimble

 

 

---

The Spectra FX Positioning and Momentum Report

Priced for Lethargy

Hi. Welcome to this week’s report. FX continues to do the low-vol thing as there are no strong themes or narratives. Global yields are moving mostly in tandem, though there has been some separation as Canadian yields fall on the back of a weak CPI release and NZ yields remain sticky as the world wonders if the RBNZ might go off script this week and hike right into strong global easing and disinflationary winds.

Risk Reversals show extreme complacency

Consistent with strong risk appetite and high complacency in equities, the risk premium in FX options is miniscule.

Nowhere is complacency more visible than in the EURNOK risk reversal. For a variety of reasons, EURNOK tends to trade highly asymmetric to equities. If equities rally, EURNOK goes down a bit and if equities sell off, EURNOK goes up a lot. This has been the primary underlying mechanic behind the ongoing heartbreak for NOK longs.

Options are a cost-effective way to hedge your EURNOK shorts, and 10-delta EURNOK calls are a cheap hedge for lower equity prices and/or global risk aversion. The EURNOK risk reversal is very close to a VIX proxy, with the odd idiosyncratic NOK blowup here and there (e.g., 2014).

Overall, downside in all currencies is as cheap as it has been in years. You can buy CAD puts, GBP puts, NZD puts or whatever suits your fancy at prices that reflect almost no risk premium. A break out of the huge rising pennant in SPX could trigger a repricing of these options. Chart on next page.

A wedge break would require a drop through 5000, so we are a long way from there. It’s also worth noting some other key levels in the S&P 500:

1. 5040: Top of the NVDA gap
2. 4987: Bottom of the NVDA gap
3. 4938: 200-hour exponential moving average
4. 4931: 200-hour simple moving average

---

G10 FX Positioning and Momentum Scores

 

That’s this week’s report. Thank you for reading.

---

2008 WSOP Royal Flush over quad aces

What are the odds?

https://wizardofodds.com/ask-the-wizard/215/#:~:text=So%2C%20the%20probability%20of%20a,overlap%2C%20with%20the%20shared%20ace.

 

 

This is a re-enactment arranged by the WSOP because the original hand was not filmed live. The hand really happened but the video is a dramatization using the real players. The guy didn’t actually splash the pot in the real hand.

---

Click here to subscribe to am/FX