The Macro Take: The path clears - go long Eurostoxx, short EURUSD
- If you are long the EUR and/or outright short Eurozone equities, then you:
- Perhaps you're contrarian and don't mind standing against a $9tn carry unwind?
- Or finally, simply don’t know what you are doing?
- Flash PMIs and US Q2 GDP (+2.1%e): EM central bank decisions are afoot
- These will come from Brazil, Turkey and Nigeria. Any more like South Africa?
- In other news, pull out a multi-year (since 2000) chart on USDCHF and look...
By Kay Van-Petersen
Sometimes there is only one or two things worth really talking about – currently in macro it is all about the European Central Bank (due eight trading days after today on December 3) and the Federal Reserve Bank (which will be due 17 trading days after today on December 16).
To me I’ll stick to the first and the clearest path of least resistance is going to be staying/adding to EURUSD shorts and staying/adding to Eurozone equities.
Now a few people think that a potential ECB easing move is priced in – this was even when the EUR was at 1.07/08, let alone Friday’s close of 1.0646 – which to me does not make sense given that:
1. We have the strongest probability of the first Fed hike in almost 10 years, in less that 2 weeks after the ECB;
2. ECB president Mario Draghi has flagged pretty clearly that he is going to move. Also recall that last time he moved more aggressively than expected;
3. The Eurozone is far from solved, if anything they are crippled even more on the fiscal and political side of things – ie hard structural reform that is needed is now harder to achieve. The recent Paris attacks will only add to tearing the inner workings of governments on a country lever as more seats shift towards far right parties.
4. Big macro structural currency moves take years. Remember it took around seven to eight years for EURUSD to go from about 0.80 to 1.60. To me this move is not over until we get into the 80-90c zone in EURUSD, which I think we will see in 2016.
5. We live in a relative world and people seem to forget that from a context sense. While a gain of 25 basis points may not seem much from a rate differential perspective, German 10-year bonds are only yielding 49 bps – basically a 25 bp Fed hike would be 50% of that.
6. I expect Q1/1H 2016 to be much weaker globally than most people anticipate – emerging markets cannot truly bounce back sustainably without China and commodity markets finding a floor (just look at copper, free fall baby!) and once again the US economy will be the strongest hand on the table.
7. I could go on…
Enough with the writing, let's bring out a few charts. We are going to walk through EURUSD and EuroStoxx running up into both: The January 22 ECB quantitative easing announcement and the March 4 ECB QE implementation. This will give us a feel of price action into and post these events.
Now history is far from a guarantee of the future and I am not saying that the ECB meeting alone should replicate these moves, however the upcoming meeting, combined with the Fed, should still capture a majority of the move – ie together they are big events.
With all that said, I feel we will break 1.06 before the ECB meeting, as I have been saying for weeks and we will test the 1.0458 lows seen in March.
Euro Stoxx Q1 2015: 1-2 weeks before and after QE announcement and implementation
So early this year, on Eurostoxx equities we could see the biggest part of the move occurred going into the event date, with a bit of tailwind post the event. So for instance, going long EuroStoxx 2-1wk (Jan 8 – Jan 15) into the January 22 meeting would have resulted in total gains of 6% and 5.2% respectively.
EuroDollar 1Q15: 1-2 weeks before and after QE announcement & implementation
On EURUSD we get the same relationship going into both events, EUR depreciating strongly. The post moves are different however, with the first QE announcement seeing some of those gains made in euro shorts being given back.
Whilst post QE implementation we saw a big further selloff in the EURUSD, remember this was also when the USD seemed destined to go to the moon and was crushing every currency in sight.
Now obviously these moves and charts do not fully adjust for other dynamic factors on going in Q1 versus now. But from my perspective, I am hearing two screaming positions here. I feel the euro is getting there, the moves towards the end of last week were most likely some dollar liquidation plus some profit taking, but I’d be expecting some significant moves down past this week and into ECB, past ECB and into Fed.
Eurozone equities in my mind are still lagging these key macro events, especially the MIB (Italian equity index) over last week.
If one looks at, say, December and January 3450 ATM calls on EuroStoxx, you would be paying a premium of 80 points or 2.3% for the December 18 expiries or around 110 points or about 3% for the Jan 15 expiries.
The highs seen in Eurostoxx this year were at 3830, a 380 point or 11% gain from Friday’s close of 3,452.45. If you get that full move you could make up to four to five times your premium and yes, it would have to be big and quick, averaging around 1.2% tick up every day until December 3 – so a little unlikely at this point, yet we have moved half of that in a week before.
But you don’t need a move to new highs (even though I think we should be moving to new highs post ECB and Fed), all you need is a 5% pop or around 175 points and you can be still making two to three times the money you paid on your calls.
In other news: say goodbye because this one is out of here…
Not been watching DollarSwissy of late, but over the weekend chart flipping, this chart almost made me spill my Earl Grey tea. Think this could be one of the better dollar longs for next year, as 2016 will be a lot more of a currency picking market – as opposed to 2015 where the USD has been the undisputed bulldozer.
USDCHF 1.0182, multi-year chart is showing us a clear long-term big break out
The week ahead
Central bank meetings this week will be dominated by EM players as we will hear from Brazil, Turkey and Nigeria. Whilst the consensus view of economists is for all their respective rates to remain unchanged, last week we saw South Africa bucking the trending and rising rates unexpectedly.
Praise the gods for no Fed speakers this week, meanwhile we will hear from Olsen, Stevens and Carney.
Economic data wise, theme will be flash PMI week. Also worth bearing in mind we have the second reading of Q3 US GDP and the cons. Number is a lot higher than the initial gain of 1.5%, as we seemed to be expecting a rise of 2.1% - make way for the Fed hike and the USD.
Do bear in mind that next Tuesday on December 1 we have US ISM manufacturing numbers which are expected to come in at 50.5e, previously just made the borderline number of 50.1p.
Now imagine a negative print - that is, contraction territory, not enough to tip the Fed (albeit they have never hiked with ISM manufacturing in negative territory nor with the VIX above 20 (VIX incidentally closed at 15.50 on Fri, down around 23% for the week), but it could send some short-term ripples before the ECB meets.
Key macro data points to watch over next week:
Speakers/Other: Mon Nov 23 – Sun Nov 29
Fed Speak – No official speeches. I know, I know… after a chorus of Fed speakers over the last two weeks, I had to check twice!
Other Speakers – Norge’s Olsen (24), RBA’s Stevens (24), BoE’s Carney (24)
MEETINGS/MINUTES THIS WEEK: Mon Nov 23 – Sun Nov 29
TU 7.50%e 7.50%p (Surprise hike like SA last wk?) (24), NG 13.0%e 13.0%p (24), Bundebank’s Financial Stability Report (24), BoJ Oct Minutes (25), BZ 14.25%e 14.25%p (Surprise hike like SA last wk?) (25/26)
MEETINGS/MINUTES NEXT WEEK: Mon Nov 30 – Sun Dec 6
RBA 2.00%e 2.00%p. Remember there was clear easing expectation PRE those blowout job numbers (1), RBI 4.0%e 4.0%p (1), BoC 0.50%e 0.50%p (1), ECB 0.05%e 0.05%p (3)
Economic data flash
Lastly, life is very similar to investing/trading, you end up with what you put up with – so set your standards high, focus on the process and profitable trading/investing to you all – be successful and don’t forget to enjoy the journey.
The effective use of our time is the most valuable commodity we have.
-- Edited By Adam Courtenay
Kay Van-Petersen (KVP) is Asia Macro Strategist at Saxo Bank, the home of social trading. In addition to TradingFloor.com, please follow him on twitter @KVP_Macro.