As we await the most important CPI release since medieval times, I offer some thoughts on the USD, rate differentials, the US labor market, and age ratios.
Why is cheddar cheese orange?
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The Day Before
Current Views
Long EURUSD @ 1.0785
Stop loss 1.0694
PPI
A strange mix of data this morning as PPI comes in hot with super cool revisions. The mix combines to leave the YoY figure close to expectations. Anyone hoping for a read through to CPI is left confused, while the early read through from PPI to PCE lowers expectations a bit for core PCE. It’s a wash, essentially.
The markets look happy to wait on the sidelines as incessant, programmatic buying of EURUSD and USDJPY continues regardless of the data, stocks, bonds, or anything. The USDJPY relationship to yields is looking particularly bizarre right now as JGB yields climb and US yields flatline. EURUSD is in a nice, boring uptrend.
Anyone trading the USDJPY vs. rates relationship (e.g., me) has been burned as the disconnect continues to widen. I don’t have a good explanation for why this is happening. Sure, volatility is low and that attracts carry basket USD buyers, but markets normally trade more on changes than levels and the change in the carry has been negative. And it’s not like EURUSD is positive carry! Note what is becoming a highly unusual divergence in USDJPY.
As I said, the divergence just keeps getting wider, and it feels stupid to be short USDJPY. But I will let you decide. Maybe now that everyone has given up on it, it’s not as stupid. Often once everyone has given up on a thing, the thing finally happens. In contrast to short USDJPY, long EURUSD has been a good place to hide out short dollars so far. Rate diffs there have been in line with FX and I think there is still a large short EUR position out there.
Here’s EURUSD vs. rate differentials. Acting normal.
Indeed
Meanwhile, the US jobs market shows more evidence of cooling. Alfonso Peccatiello pointed out the Indeed series today. I found the data interesting, especially as it confirms the wage stickiness of the UK and Canada as compared to the USA. Ongoing evidence that the US is becoming less exceptional, and slack is coming back to America.
BoA FMS
Unrelated, I thought this chart from BofA (via Twitter) was interesting. It is a useful reminder that things can trend, and positioning can remain elevated for long periods. This is especially true with bullish equity sentiment because stocks trend higher for longer than most other asset classes.
In FX, some currencies are good to trade contra to sentiment and positioning (GBP and CAD) while others backtest better if you go with the trend, sentiment, and positioning (USDJPY). This is true across asset classes too. The takeaway is that when you see extreme long positioning, have a think about whether that is bullish or bearish for the particular currency, security, or asset class. It can be either. Or neither.
Final Thoughts
Happy Birthday to Shim! When we met, I was 30.4% older than him. Now I’m only 15.9% older.
Have a cheesy day.
Why is cheddar cheese orange? (source)
Because cheesemakers add orange coloring during the cheesemaking process. It’s the result of hundreds of years of tradition, dating back to the time when cheddar cheese in England was made with milk from cows whose beta-carotene-rich diet produced an orange tint in the milk. Today, orange cheddar cheese is colored with annatto, the fruit of the achiote tree, while white cheddar is made without any added color.
Annatto is the orange coloring that comes from this sort of achiote tree
