We knew this week was going to momentous with multiple event risk tape-bombs every day, but aside from Apple’s “four comma moment” it appears The PBOC just trumped The Fed, The BoJ, The BoE, and earnings, as former fund manager and FX trader Richard Breslow notes…“just like that the PBOC changed your day.”
I feel utterly in-tune with the markets. It’s Friday, it’s August and I was watching the clock even before the sun rose. It was meant to be a really fun and dispositive week full of momentous news. Well, it would be a gross mis-characterization to say it was full of giggles, but we did learn some important things. Or maybe it’s better to say reminded of matters that analysts keep trying to deride but traders can’t ignore.
Ranges have been tight, volumes abysmal and most assets have “pared,” or in some cases, erased, their early extremes. Liquidity will be priced at a premium, so take things with a grain of salt.
Risk reduction before the weekend is prudent and remains standard operating procedure. Especially when news such as the PBOC raising reserve requirements on FX forwards well after the close of their official trading day could be sprung out of the blue when no one was paying attention.
Who would have thought that at 9 a.m. London time, when the on-shore yuan found a bank suddenly willing to aggressively buy the currency, that it was something everyone needed to think about? At the time it felt like that was the time-marker signaling the de facto end of the trading day rather than a recast of how things might go.
Emerging markets do remain under pressure. The number of people telling me that the carry is compelling at these cheaper valuations has dwindled as the week progressed. Turkey saw to that. Still, the small bounce in their equity markets today on the back of yesterday’s U.S. push will no doubt influence a new round of optimistic commentary. And these markets do bear watching closely. But I don’t think there need be an urgent rush to suddenly grab whatever you can get your hands on.
Stocks may behave like lemmings but currencies don’t lie. And the MSCI Emerging Markets Currency Index is at a very crucial technical juncture. It sits at a level that has held multiple times going back to last year. It is also at an important retracement level of the whole move up from January 2016 to the highs of March this year. If this holds again, we will be due a bounce. If not, it won’t be an insignificant statement. There are tons of conflicting fundamental factors at play, so let the lines do the heavy lifting.
We began the week having to endure people telling us to sell dollars and, in particular, buy euros. It was the vote with your heart not your mind recommendation, that ignored the reality of rates and growth. Still, the dollar index is also getting up toward levels that have previously held. Take a look at BTP yields before assuming it’s necessarily an easy trade and the recent range inviolate. But it might be.
In a new development that should be carefully watched, the European FRA/OIS spread has been widening out as a suspected hedge against potential banking stresses in Italy. It’s a cheap and potentially lucrative form of buying insurance against trouble. And a lot less expensive than doing it in the currency option market.
I said yesterday, that I was fixated on the yuan. And I still am. The PBOC’s action today won’t have solved all of the world’s problems, but it will certainly affect short-term price action. And then we’ll see where things stand next week.