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Arbitrage Pair Du Jour: Compress EURUSD vs Italy Bonds
It has been a while since we have seen any clearly actionable compression (or divergence) trade opportunities in a market that so far in 2012 been abused almost exclusively by central planners and robots. However, today we believe it is time to point out what appears to be a very distinct arb pair: specifically, the divergence between the EURUSD and the Italian-Bund spread. As can be seen on the chart below, the first time we saw a material divergence between the two very tightly correlated series was in mid-March when the phase out of LTRO2 spooked the FX market but still left enough dry powder at Italian banks to provide a fake support for Italian bonds. That did not last long, and the subsequent month saw another push wider in Italian (and Spanish, and all other PIIG) spreads to Bunds, however not wide enough. It appears that a long EURUSD vs. short Italian bonds (or rather Italian-Bund spreads widening) here could provide for substantial alpha, with either roughly 300 pips in EURUSD upside, or nearly 75 bps of Italian spread upside once the dust settles and the two series reconverge.
As usual, we merely point them out and advise readers to have a big balance sheet when putting on pair trades unless they want to get themselves Iskil-led.
h/t Andy Yorks
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Bankruns in eurozone are going on.
Merchants all over the world are starting to put up "no euros" signs in their establishments.
Credits/Euro's Will Do Finehttp://youtu.be/skv3wSIL5xI
I'm looking forward to Greece leaving the Euro, It'll be the best thing to happen to Europe since the Holy Roman Empire was established!
-Frank
http://successfulwebmarketing.wordpress.com/2012/05/16/how-to-write-a-budget/
Sources?
Regards,
Cooter
http://www.battleswarmblog.com/wp-content/uploads/2011/12/EuroZone.jpg
I would like to see a picture please.
Did someone say Italian pair? As is illustrated with this classic head-and-shoulders, below, the material divergence between the two very tightly correlated series still leaves plenty of gap in the Italian assets and obviates any need for fake support. Any push up higher would likely cause a blow out of spreads.
Solid analysis.
Perhaps the Italians have finally gotten their act together and have earned their way to a higher credit risk.
Bwahahahhaha!
Summer has officially started people.
Spring has officially started ants.
Thank's for the heads up Tyler but I think I'll pass on that trade.
Agreed. Do not trust.
I think I've had enough margin alert emails for now. Barely got out of this one alive. Time for a rest.
I am creating a rumor that if you buy Facebook stock next week you will receive a 1,000 New Drachma note with you order....
Material divergence of EURUSD and Italy-Bund spread... blah blah...
Show me a graph of Zuckerjew's marital divergence as he becomes the next MySpace Tom. Even an ugly chinawoman wouldn't stay with a loser like that.
The ECB will soon own Spain, since it's carrying almost 100% of the country on it's balance sheet. More madness from the Europeans:
Spain's Prime Minister Mariano Rajoy will ask the European Central Bank on Wednesday to buy Spanish sovereign debt, which will help fix Spain's liquidity problems and guarantee the financial stability of the euro zone, reports El Mundo in its Wednesday Internet edition.
Meanwhile, the ECB has resisted calls for a more active role and is supported in its stance by Germany.
Citing a telephone conversation between Rajoy and Alfredo Perez Rubalcaba, the leader of Spain's opposition party PSOE, the newspaper says Rajoy added that further flexibility in the calendar to meet economic targets as well as the possible issuances of euro-zone bonds will not be on the table Wednesday at the European Union summit.
Newspaper Web Site: www.elmundo.es
Provided one subscribes to a static EUR/USD Swap based model. However, since "growth" is on every Eurolander's lips at the moment, one has to wonder how much longer the ECB will hold rates at 1%. And once that rate cut comes (and it could come any minute now), the rug will be pulled out from the only source of Euro levitation at present. "Mind the Gap". :)
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