AUDJPY-ES Divergence Heading Back To Sloppy Summer Levels

Tyler Durden's picture

The current divergence in the AUDJPY-ES pair is reminding us of the great divergences seen in the during the summer just after the temporary DE Shaw stat arb desk unwind threw every correlation pair out of whack for hours. And with the telecom and commodity subsectors of the CSI undergoing a drubbing, we are confident that the AUD, especially following the earlier lack of action by the RBA, will continue to face ongoing weakness. And sooner or later that means that dollar funded shorts (USDJPY/AUDUSD) which have been the primary source of purchasing power in the US market, will need to be unwound. In the meantime, a compression trade here seems quite attractive.

And here is Bloomberg discussing the possibility of Chinese tightening, noted here earlier:

China’s stock-index futures fell, signaling declines for the benchmark index, on concern the government may raise interest rates as soon as this weekend to tame the fastest inflation in two years.

Futures on the CSI 300 Index expiring in December, the most active contract, lost 1 percent to 3,144 as of 9:16 a.m. local time.
Industrial & Commercial Bank of China Ltd. and developer China Vanke Co. may pace declines among financial stocks after the China Securities Journal reported the “window” for China to increase borrowing costs rates may be this weekend.

“Clearly, China has entered a cycle of interest-rate increases,” said Zhang Qi, an analyst at Haitong Securities Co. in Shanghai. “That will keep pressuring stocks until tightening measures abate.”

The Shanghai Composite Index, which tracks the bigger of China’s stock exchanges, gained 14.75, or 0.5 percent, to 2,857.18 yesterday. The CSI 300 Index rose 0.2 percent to 3,165.57.

The Shanghai gauge has lost 9.6 percent since reaching an almost seven-month high on Nov. 8 on concern that monetary tightening will curb economic growth. The central bank last month ordered banks to set aside larger reserves for the second time in two weeks after raising interest rates in October, the first increase since 2007. The measure remains down 13 percent this year.

The period around this weekend may be a “window” for China to raise rates, the China Securities Journal reported on its front page, citing analysts at domestic banks and brokerages.

Of course, it wouldn't be the mainstream media if it didn't try to somehow paint monetary tightening as a positive (!) event. From Dow Jones:

State-run China Securities Journal report earlier today that cites analysts saying China's central bank may raise interest rates around this weekend, before release of November inflation data Monday, will likely be taken as partial removal of short-term overhang rather than negative news. Rate hike worries have clouded China, HK market performances since release of October CPI (in early November) that showed greater-than-expected inflation pressure. Front-page report also says upcoming Central Economic Work Conference raises chance of rate hike soon; adds CPI may have picked up in November following October's +4.4% -- a 2- year high. HSI peaked at 24,998 Nov. 8, then started to correct, in no small part due to worries over possible further tightening measures by Beijing


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IrrationalMan's picture

actually it has been multiples worse lately for the wild swings.  look at it over a longer time horizon and divide one by the other.

Caviar Emptor's picture

The Mandarin calculus of China. 

Beyond raising in the short term is the looming specter of inflation echoing around the world. It's getting hard to deny that it's already here including the peculiar situation in the US where deflationary forces are canceling out inflation in the numbers, but bludgeoning purchasing power harder than simple inflation (houses and incomes ain't rising). 

blunderdog's picture

So anyone who's done it...what's it cost to be able to navigate these trades?

Is it $100K for a Bloomie terminal and...more too?

IrrationalMan's picture

 you can probably get by with Think or swim or Interactive brokers.

digitalhermit's picture

An easy trade to pull off with IB or any other broker than lets you trade spot forex and ES future contracts simultaneously. A $10k USD balance is more than enough to handle the margin requirements for a single ES contract and the matching/offsetting AUDJPY.

Orly's picture

IBFX to trade 4X.  Free demo...

pile of poop's picture

Screw the compression trade.  Just short /ES as AUD/JPY would follow any move down, but tends to lag on the upside.