July 15th, 2016 5:46 am | by John Jansen |

Via Kit Juckes at SocGen:

A sombre mood at the morning meeting and thoughts are with the bereaved and injured. Markets don’t matter much next to all this but risk sentiment is hoilding up, the yen is weaker, the pound is stronger, equities up, commodities stable and 10yr Notes comfortable above 1.5%.                                                                                                                  Chinese data were better than expected, GDP 6.7, IP 6.2, retail sales 10.6, ex-rural capex 9%.                                                                                                                                              UK construction output, US retail sales (exp -0.4 but +0.4 ex gas and autos), CPI (2.2 y/y core), IP (0.3), Empire State, U-Mich data are all due.                                                                                            The US data may matter less than the S&P for bond markets. The bounce in yields is more normalisation than anything else and if we keeep 10s above 1.5% and equities remain bouyant, the yen is likely to weaken further. My mindless mean derings on drone money are below. As for the pound, the short-squeeze has gone on and if the view at the start of the week was to sell it somewhere in a 1.30-1.35 range, I’d better get on with it. The market is now doubtful about what kind of easing it will get in August, but it looks as though we’ll only get to 0.25% and not to zero. I’d sell gilts before I bought pounds, but we still can’t get away from the probability of much more uncertainty-driven economic weakness before the Davis/Johnson dream team woo the EU into a mutually-beneficial UK exit deal (or not…)

As for the FX weekly…

Monetary financing of public sector spending isn’t a giant leap from where Japan is today – it could get there in a series of small steps. It would be more a case of ‘drone money’ than ‘helicopter money’ if the BOJ were to go from buying longer and longer-dated debt with lower and lower coupons to something indistinguishable from zero-coupon perpetuals. But away from such idle speculation, with monetary and fiscal policy working hand-in-hand to drive inflation expectations up, and to drive investors out of domestic assets, there’s room for the yen to weaken (quite a lot) further; all the more so as the US economy stabilises.


Helicopter money drops are not imminent in Japan, but the concept is worth discussing given the growing interest. The limitations of QE policies that work through the banking sector have become apparent, and fiscal policy that works directly on boosting aggregate demand is becoming attractive. Helicopter money is “money-financed fiscal stimulus”, and was first mooted in the event that conventional monetary policy became exhausted. While the concept is not difficult, it has profound implications for the management of monetary policy and the thorny politics over fiscal policies in many major countries.

Vol: As markets experience a relief phase after the UK referendum, the risk is that both EUR/USD and USD/JPY head south by the end of the summer on the back of resurgent risk aversion. While the 2m realised correlation between EUR/USD and USD/JPY is turning positive for the first time since 2013, the 2m implied correlation remains entrenched in negative territory. We take advantage of this pricing opportunity via a 2m basket put on EUR/USD and USD/JPY, with a strike 1% OTM.


Technicals: NZD/CAD has turned down from the key resistance at 0.9560/0.96, and is testing channel support at 0.93, which if broken would open the way to further downside. GBP/USD has confirmed a massive head-and-shoulders pattern, and is likely to head towards 1.2450 so long as resistance at 1.35/1.3540 holds.

The quant portfolio has maintained a pro-risk stance during the week. The biggest longs are in NZD, AUD and RUB, while the most sizeable shorts are in USD, SEK and EUR. There are long exposures to G10 and EM carry baskets using the full risk budget, but the Asian carry model remains closed.


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