Making Sense

 Finally the trade  (click the link to refer to the trade) is performing after the long hold. Nov swap points traded a high of 1.78%.

"I think a life properly lived is just learn, learn, learn all the time" US Treasury Curve bull steepened overnight on dovish comments from an otherwise hawkish FOMC member Christopher J. Waller, DXY plummeted and Gold prices after being capped at $ 2000 since October finally broke out higher to trade a high of $ 2043. In his speech titled "something appears to be giving, and it's the pace of the economy", Mr. Waller commented that economic growth has moderated and that is more in keeping with progress on lowering inflation. Fed Reserve Board Member Waller said " I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent. That said, there is still significant uncertainty about the pace of future activity, and so I cannot say for sure whether the FOMC has done enough to achieve price stability. But the recent loosening of financial conditions is a reminder that many factors can affect these co...

Too much to catch up on after the long hiatus.. A lot of travel and a lot of celebration as I attended a Close Relatives wedding and celebrated my 40th Birthday. My personal life over the last week mirrored the Risk on moves in Financial Markets. Loved every bit of it and felt overwhelmed by all the family love. Coming back to markets now.... "It's only when the tide goes out that you find out who's been swimming naked" ~ Warren Buffett U.S Economic data for Oct pointed to a soft landing narrative. U.S CPI came in at 0.0%, prior 0.4%; Core CPI 0.2%, Prior 0.3%; PPI -0.5% , prior revised lower to 0.4%; Core  PPI 0.0%, prior was revised to 0.2%. Retail Sales came in at -0.1% , prior was revised higher to 0.9% from 0.7%; ex-auto came in 0.1% , prior was revised to 0.8% from 0.6%. Initial Jobless Claims came in at 231K and Weekly Continuing Claims came in at 1.865 mln.   Recap of moves in UST over the last week below:  USTs High Low      Close WoW...

The discipline that is most important is not accounting or economics, but psychology. USD 24 bn of US 30Y bond auction saw weak demand with Bid-to-Cover Ratio of 2.24 which reflects poor demand in comparison to the 2.39 ratio seen over the prior 12 auctions. Along side a poor auction, comments from Fed Chair Powell accelerated the sell off in the bonds. The Key takeaway from the speech was that FOMC is not yet confident that the stance of monetary policy is sufficiently restrictive as strong growth could undermine progress on inflation and restoring balance to the labor market.  US2s +8 bps, 5.02% , High 5.04% - Low 4.92% (Swing High 5.26%) US10s +13.50 bps, 4.63%%, High 4.65% - Low 4.47% (Swing High 5.02%) US30s +15.00 bps, 4.768%, High 4.83% - Low 4.61% (Swing High 5.18%) US2s10s -39 bps (+ 6 bps) DXY 105.90 (+0.35%)  On the India macro front, On Nov 9, liquidity deficit widened to INR 46K crore and Overnight WACR was anchored around the upper corridor band at 6.79% The OIS ...

 There is no such thing as a good or bad idea regardless of price! Goodmorning!! The US equity markets and the USD index were placid. Crude Oil prices moved decisively lower below the $81.60 support to trade a low of $79.13 following less than encouraging China data, API inventories, weak demand outlook by EIA and US2s10s bull flattened. The much awaited Fed Chair Powell's speech focused on the need for greater adaptability in forecasting techniques and refrained from any discussions around Monetary Policy. Today again he will be part of a panel discussion so be tuned to the wires.  US2s +2 bps, 4.94% , High 4.955% - Low 4.91% US10s - 7.50 bps, 4.495%%, High 4.61% - Low 4.49% US2s10s -45 bps (- 10 bps) DXY 105.53 Flat on the day  Fed Fund pricing Peak Terminal Pricing 5.37% Jun 24 Pricing 5.06% ~ market is pricing in one full 25 bps rate cut by mid next year Dec 24 Pricing 4.45% On the India macro front, On Nov 7, liquidity deficit widened to INR 21K crore possible o...

I posted the Trade Idea to pay forwards  on Oct 25. Simply put, Forwards are the interest rate differential between U.S rates and India Rates and if forward expectations for US rates were to move lower, the spread would widen and hence paying on the long end of the curve made sense.  The hypothesis was that Dec 24 implied Fed Fund pricing is finding resistance at 4.80% - 4.85% level and the bar for market pricing to converge towards guided Fed Path of 5.10% is higher. Hence, Risk reward favors a move lower on the market pricing of FFR, esp in light of lower inflation prints in the US.  Markets have a way of surprising as interest rate differentials are not the only determinants of the forward curve. Global Economic Policy uncertainty, Banking system liquidity and intervention in forwards also drives forward premia.  We have seen a sharp move lower in forwards driven by the front end of the curve as Cash Tom (C/T), Tom Spot (T/S) and Cash Spot (C/S) points collapse. C...

 Asia markets are seeing a rebound on risk sentiment after US equities fell with Dow leading losses of 1.89%. ECB kept the rates unchanged and stayed away from calling a peak in rates and focused on a data dependent approach.  Initial Jobless claims (IJC) rose 10K rom the prior week for the w/e 20 Oct to 210K while Continuing Jobless Claims (CJC) rose 63K to 1790K. CJC are seen rising since start of September and are at levels last seen in April end. Strong beat on U.S Durable goods orders, for the month of Sep, orders rose 4.70% yoy following a revised reading of -0.10% in the previous month. Pending home sales rose 1.10% mom following a 7.1% contraction in the previous month. US GDP beat expectations with Q3 growth seen at 4.9% following a 2.1% expansion in the previous quarter. The street took comfort from the core PCE deflator which came in below street estimates of 2.40% and the narrative that Q3 marks a peak in growth. A Research house reported that the PCE deflator impl...

Hi, I couldn't write the post the last 2 days since I was in Kolkata celebrating Durga Puja. I was positively surprised at the traffic management and the good road conditions. I remember when I last visited some 15 years back for Durga Puja,  the roads were heavily congested but this time the vehicular movement was smooth. The pandals are beautiful and illustrate the bedrock of creative talent coming out of Bengal. When you move across the narrow alleys, you know the love for Puchkas, Meat Rolls, Biryani and Tea. Interestingly, this time I observed the love for Vests and Lycra as the streets are full of billboards from Lux Cozi, Rupa and VIP. It was a wonderful trip and worth a visit !! Coming back to markets now, The implied Fed Fund Pricing* for peak terminal rates is 5.43% (+10bps) and Dec 24 pricing is at 4.63% (-80bps). The terminal rate pricing has ranged between 5.49% - 5.37% over the last three months and the Dec 2024 pricing has exhibited sharp volatility with lowest pric...

“…inexhaustible perseverance and patience… knows no defeat.”  RBI announced the MPC decision today. Key Highlights: Repo Rate stands unchanged at 6.50% (unanimous decision) SDF Rate 6.25% and MSF at 6.75% Stance continues to be "withdrawal of accommodation" (Vote 5 to 1) Inflation projected moved 10 bps lower for full FY 24 to 5.2% from 5.30% on crude oil price assumption of $ 85 per barrel ( last policy $ 95) and a normal monsoon.  Inflation Outlook - The risk to inflation trajectory are evenly balanced with upside risk emanating from adverse climatic conditions, higher and likely to stay elevated milk prices into the summer, rising uncertainty in Intl Financial markets and imported cost pressures GDP is projected to grow marginally higher at 6.50% with 10 bps upward revision in both Q3 and Q4 FY 24.  GDP Outlook - The risks to domestic growth are evenly balanced. High Rabi production, steady growth in services sector, GoI's focus on capital expenditure, higher capacity ...

  Quick wrap on the market moves in the Asian Session: USDINR touched a low of 81.63 on Monday and caught a bid towards the end of the session as risk sentiment deteriorated. Today, trading in USDINR has opened with a gap up on hawkish remarks from the Federal Reserve Chairman. Balance 25% holdings were squared on the gap up. Next crucial resistance for the pair is 82.30. Domestic equity markets are trading in the red with Nifty at 17700, down 0.30% and is seen facing resistance at the 17770 level .  India  Money market operations (figures in bracket show prev day closing numbers) LAF absorption                     -49,000 crores (-61,000 crs) O/S Repo                                  +89,000 crore (+86000 crs) SDF+MSF                       ...

"The goal of a successful trader is to make the best trades. Money is secondary." Quick wrap on the market moves at the start of Asian Session: USDINR is in a strong momentum lower and part of the position was squared off  . Follow the momentum !! 81.75 is an important support but the move could very well stretch to 81.50 or 81.02. We need to look for price action to confirm a reversal trade. Patience !! Patience !! Domestic equity markets are trading in the green with Nifty at 17788, up 1.1% after failing to break the 200 DMA at 17414. FPI flows have been stable with Friday number seen at $ 30 mn inflow. The Services PMI released on friday showed services activity at a 12 year high and robust GST collection of Inr 1.50 trn in the month of February. India Money market operations (figures in bracket show prev day closing numbers) LAF absorption                     -61,000 crores (-82,000 crs) O/S Repo      ...

"What we hope ever to do with ease, we must learn first to do with diligence" Asian markets are trading higher as China resumes after week long Lunar Holidays. China re-opening alongside lower quantum of rate hikes from the US Fed has lifted the sentiment around EM currencies.  USDCNH (6.75) is now back in the consolidation range of 6.65 - 6.78 in which the currency was trapped from May until mid August 2022.  USDKRW (1228) is trading below the May 2022 lows and now finds support at 1206-1207 levels. USDTHB (32.73) is also fast approaching the Feb 2022 lows at 32.07. While KRW and THB have appreciated over 15% against the USD followed by CNH, IDR has been a relative underperformer, appreciating only 5.50% from peak to trough.  USDJPY has been facing resistance at 130.60 - 131.00 levels since 23rd Jan 2023 with market consensus leaning towards further widening of the YCC band. Today, a report by a panel of academics and business executives urged the BOJ to make its 2% infl...

 In my earlier  post , I had promised to cover more on forwards. In the earlier post on Jan 23, 2023, I had written  "A quick look at the pattern of outstanding RBI forward book shows that in the last 2 years, RBI is seen paying forwards in the last quarter of the FY. In 2021, RBI's forward book swelled from o/s longs of $ 47.38 bn in Jan 2021 to $ 72.75 bn in March 2021. In 2022, a similar pattern was observed where the book swelled from $ 50bn in Jan to $ 66 bn in March 2022." That prompted the question around the cause of such paying activity. A market veteran guided me to look at RBIs behavior from a balance sheet and capital management perspective and it now makes sense. So what happens when RBI intervenes in spot market: When RBI buys foreign exchange, the Net Foreign Assets rise on the RBI's Balance Sheet.  In lieu of FX purchases, RBI releases INR liquidity in the banking system which the banks deposit as reserves. So the size of the RBIs Balance sheet increa...

 RBI released the November monthly bulletin.  Operations in the OTC segment show RBI net bought $ 4.36 bn of foreign currency and accumulated the long forward book to the extent of $ 8.25 bn with total outstanding forwards at $ 8.49 bn. RBI had unwound the forward book from a peak of $ 65.79 bn in March 2022 to $ 241 mn in Oct 2022 on FPI outflows and rising trade deficit.   You could refer to the  Oct 2022  data here. A quick look at the pattern of outstanding RBI forward book shows that in the last 2 years, RBI is seen paying forwards in the last quarter of the FY. In 2021, RBI's forward book swelled from o/s longs of $ 47.38 bn in Jan 2021 to $ 72.75 bn in March 2021. In 2022, a similar pattern was observed where the book swelled from $ 50bn in Jan to $ 66 bn in March 2022.  The above data leans towards a pay on dips strategy. Interest Rate differentials are the primary drivers of FX Swaps with other factors like system liquidity, intervention, econ...

 "Discipline is the bridge between roads and accomplishment" Third estimate of the US Q3 GDP was revised higher to 3.20% from 2.90% on revision in consumer spending to 2.30% from 1.70%. The GDP Price deflator was revised up to 4.40% from 4.30%. Initial claims for the week ending Dec 17 2022 increased to 216000 (+2000) and continuing claims fell to 1.672 mn (drop of 6000). While David Tepper comments' , an American Hedge Fund manager, “I would probably say I’m leaning short on the equity markets right now because the upside-downside doesn’t make sense to me when I have so many people, so many central banks, telling me what they are going to do, what they want to do, what they expect to do,”; further roiled sentiment.  Strong GDP numbers, labor market strength and negative outlook from one of the most successful hedge fund managers added to market concerns of overtightening by Federal Reserve despite a declining inflation print and deteriorating data ( Home Sales / PMI / Re...

 Goodmorning!! “A man is but a product of his thoughts. What he thinks he becomes.” - Mahatma Gandhi A quick wrap up of yesterday developments -  BoJ will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank. BoJ expanded the band around the 10Y yield target to +/- 0.50% from +/- 0.25% and increased the monthly bond buying under the new quarterly bond buying plan to yen 9 trn from earlier yen 7.3 trn. The move was attributed to improve the market functioning and formation of the yield curve. The JGB curve steepened with the 1x10 curve at 0.5350% from the earlier 0.34%. BoJ emphasized the current move as not a rate hike or policy accommodation removal. He also mentioned that he will be closely watching the next Spring's wage negotiations and the Trade Unions have announced a nominal wage growth target of 5%. However, the market does not believe the BoJ narrative and interprets the re...

 Like I mentioned in my dec 6, 2022 update, I liked paying forwards. Forwards have bounced sharply. 30 Nov 23 forwards are 10 bps higher (prev close 1.77%) with 129 trades going through and volume of $ 1.20 bn. Stay paid !! Dec 15 2022 - Forwards continue to be paid with the Nov 2023 contract trading upto a high of 2.05%. I'd like to book some profit at the current level (40% of the position size).