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Nic Lenoir: "The Market Now Has Either +1 Or -1 Correlation"
By Nic Lenoir of ICAP
Good morning,
Just wanted to start the day with a couple things that caught my eye
this morning. First of all the EURUSD has reached an interesting
overlap around 1.3250 so we will pay close attention as to whether the
market can post a daily close above that level. Being long term USD
bulls, we turned neutral when the pair posted an inverted H&S on
the lows and broke out above at 1.2250. Then we finally saw the light
when the market reached 1.28 with the attached EUR-USD 3M Libor chart
attached: the rate spread is driving the pair higher and is now at
levels that would correspond to EURUSD trading around 1.50... Given
that the market traded down uninterrupted from 1.50 to 1.18, we would
be very cautious here as this could go a lot higher if the rate spread
doesn't abate. Interestingly the last few days the euribor setting has
struggled to make new highs. Meanwhile 3M USD libor is down trading at
43bps and downside here is limited as long as the fed doesn't take
additional measures to lowr the fed funds rate currently averaging
between 18 and 20 basis points. At this point outright EURUSD longs may
want to hedge to play the relative value by selling the EDU0/ERU0
spread or the EDZ0/ERZ0 spread. By the same token, I struggle on the
180-minute chart to find anything but a very bullish wave count for
EURUSD in the short-term.
With the WSJ running a front page article on more QE by the Fed and if
you factor in recent comments by Chairman Bernanke or Mr. Bullard, we
have a lot of Fixed Income shorts running for the hills in the USD this
morning, and these discussions are certainly not in favor of a strong
USD, so this is also boosting EURUSD higher. But part of it is also EUR
strength. We recommended yesterday buying EURGBP against the rate
spread (using 2Y swaps though any red Euribor/sterling spread should be
close enough a proxy) or even against buying puts on short sterling.
Part of this is of course due to the Euribor setting flying higher, but
against 2Y swaps we see the currency pair is diverging as much as it
has in years against yields so we recommend playing the convergence
here which will be especially relevant if the Euribor setting indeed
stabilizes and stops rising (or declines). With QE discussions going
around trading EURGBP against the EUR/GBP rate spread will give a more
neutral position as puts on sterling won't perform if short-sterling
futures underperform Euribor futures in a rally.
We have been preaching that this market is a huge leveraged affair and
is driven pretty much exclusively by funding and liquidity. Following
the money flows is definitely the best guess as everything else will
follow suit in a market where correlations are de facto +1 or -1 based
on which side of the carry trade you are. This shall continue.
Finally look at AUDJPY versus the S&P future. AUDJPY is the poster
child of carry trades, and with JPY strength across the board, the pair
is diverging quite a bit from the strength of the S&P futures. Here
again we would recommend selling S&P futures against buying AUDJPY,
unless you prefer selling equities outright but as per my update
yesterday we have not seen the upside targets yet (first in line at
1,126... maybe close enough? I will wait to be outright directional but
the convergence is a good value play for the day).
Nic
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Sounds like a great strategy to play the exact game as the stat arb computers tied in with fiber optic lines to servers directly at the NYSE - where I believe the state of the art is around 10 ms for a trade.
Sure folks sitting in their pajamas at their home computers can win that game - just have to try harder!!
Good luck with that.
10ms = slow
<2ms response time typically. Raw response time is in the fractions of a ms.
That's the name of the game these days.
Only NYSE doesn't want to comply with the industry standards - I wonder how 'FLASH CRASH" doesn't occur every other day in the equity markets...
Which is why they're losing more market share each and every day as other ECNs get more order flow.
'Hey look, we only have a very small amount of HFTs on our exchanges!!'
Chart: AUD/JPY
Madame President, your wedding in Rhinebeck was so beautiful! Would you share some photos from your marriage?
http://www.screencast.com/t/Njg0ZDU2M
It happens to the best of us.
the FXY is right at the top of an ascending triangle....I don't believe it will break to the upside yet....
Oh, and Margaret Brennan is wearing a very nice blouse today.
here comes the spin doctor -- Nic Lenoir..... bear at the end of June, bull nowadays...
"being a LT USD bull" he sees 1.50 target in EURUSD (look at his 'sky is the limit' note on the chart) :))
I bet he'll turn bearish if S&P went below 1000 in the next couple of weeks
turn baby turn baby turn
Gotta follow the trend - agenda is money making. If the trend is bullish (which it currently is), why be stubbornly-bearish?
Keep in mind that Nic's recommendations are "free" on an internet blog (not exactly what you would expect from a premium service) - take it for what it's worth....
sorry for the noob question but what application do they use to produce those charts?
The last 3 are Bloomberg, its a terminal
Bloomberg terminals.
Got $$$?
You can have one too!
Just don't expect <2 ms transaction times on your brokerage account.
Long live machina!
Its from a bloomberg terminal, which runs approx $1,500 a month. Lots of big trading desks have them, and I suppose the people who own yachts and helicopters.
It does make some nice charts and spreads, statistical correlation analysis etc..
Any thoughts on why the euribor strength? It made 2010 highs last week against 2010 lows in 3-month ED. Doesn't seem to be due solely to liquidity concerns in the eurozone, based on that rate divergence and CDS premiums. It certainly does seem to be the driver to recent EURUSD strength, even with SNB an active seller. Thanks!
Thanks as always Nic. From what I can see the EUR/USD weekly chart has a 'death cross' now of the 50W/200W lines. Based on that 136-137 looks like a ceiling.
Great posts.
There are certainly a lot of details like that to take into consideration.I read and understand the entire article and I really enjoyed it to be honest.
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