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7 Jan 2014
Flash: Feel the force of US Treasury curve wobble - Societe Generale
FXstreet.com (Barcelona) - Sebastian Galy, Senior FX Strategist at Societe Generale feels a disturbance in the force, a feel he notes when the mighty US Treasury curve wobbles a bit.
Key Quotes
“These wobble reveal much about market positioning and psychology. The rally in equity markets and trends of the past few weeks such as USD/JPY are stretched, but mean-reversion quickly kicks in, suggesting it is a buy on dips.”
“For anyone who traded in 2006/07, this environment of carry trades dominated by systematic strategies is quite familiar. It makes you optimize yield vs volatility and hence under-price tail risk. Surviving strategies are therefore those of mean-reversion.”
“The search for yield is confirmed by the reaction of the market to lower than expected core inflation in Europe ahead of the ECB meeting. Peripheral bonds are hence rallying as the market prices in a higher probability of ECB activism to help capital flow there.”
“Crucially the miss comes from the very sticky service sector, suggesting a deeper than expected deflationary pressure in a sector normally more protected from international competition than the goods sector. Earlier over the week-end, Bundesbank Weidmann had mentioned the use of counter-cyclical risk capital tools, a necessary step to segment the lending market between core and periphery.”
“EUR/USD is actually edging higher with lower peripheral yields trumping any swap spread differential between EU and US. More interestingly, EUR/CHF is also moving higher after months of not reacting to better European data."
"Potentially it may indicate that the long awaited reallocation to European bonds by Swiss asset managers is finally happening on some small scale (EURCHF is now a small market vs USDCHF).”
Key Quotes
“These wobble reveal much about market positioning and psychology. The rally in equity markets and trends of the past few weeks such as USD/JPY are stretched, but mean-reversion quickly kicks in, suggesting it is a buy on dips.”
“For anyone who traded in 2006/07, this environment of carry trades dominated by systematic strategies is quite familiar. It makes you optimize yield vs volatility and hence under-price tail risk. Surviving strategies are therefore those of mean-reversion.”
“The search for yield is confirmed by the reaction of the market to lower than expected core inflation in Europe ahead of the ECB meeting. Peripheral bonds are hence rallying as the market prices in a higher probability of ECB activism to help capital flow there.”
“Crucially the miss comes from the very sticky service sector, suggesting a deeper than expected deflationary pressure in a sector normally more protected from international competition than the goods sector. Earlier over the week-end, Bundesbank Weidmann had mentioned the use of counter-cyclical risk capital tools, a necessary step to segment the lending market between core and periphery.”
“EUR/USD is actually edging higher with lower peripheral yields trumping any swap spread differential between EU and US. More interestingly, EUR/CHF is also moving higher after months of not reacting to better European data."
"Potentially it may indicate that the long awaited reallocation to European bonds by Swiss asset managers is finally happening on some small scale (EURCHF is now a small market vs USDCHF).”