Fed and ECB Share Responsibility for latest bond Tantrum


From my long time friend Peter Wadkins of Thomson Reuters. Peter enters his 46th continuous year in Fx trading from all levels, including head of Treasury for 10 years at New South Wales bank. Peter was on the CME floor in 1983 when AUD began its free float. Remarkable career and from a good, honest, decent god fearing person.


COMMENT: Fed and ECB share responsibility for latest bond tantrum

Jul 7 6:34am By Divyang Shah

LONDON, July 7 (IFR) – If you look at the absolute change in benchmark bond yields then on this basis alone the current ECB-inspired taper tantrum is worse than the Fed taper tantrum of 2013. The absolute change in 10-year Treasury yields eight days after Bernanke’s testimony to Congress on 22 May 2013 was around 20bp, which is a lot lower than the 32bp gain in 10yr Bund yields since Draghi’s Sintra speech last week. (The percentage changes are even higher, especially for EGBs)

This is history and looking forward the potential for a more violent adjustment in bond markets is high, but for now central banks are unlikely to be too concerned. There are four key differences between the ECB taper tantrum and the Fed taper tantrum of 2013.

First, it’s not just about QE. When the Fed was shifting gears the market was aware that the gap between QE taper and rate hikes was large. In contrast, the ECB has been trying to contain the debate over sequencing and whether its negative deposit rate can be hiked during the tapering process. The market certainly believes this is possible, attaching a high probability that the ECB will have a less negative deposit rate by the end of 2018.

Second, the bias from major central banks on policy has also shifted. The BoC has been busy preparing markets for a rate hike as soon as its July meeting, the Norges Bank and Riksbank have both dropped their easing biases, and the Fed has been willing to talk about Quantitative Tightening (QT) despite downward surprises on inflation. The backdrop is one of change when it comes to global central banks and has been a surprise.

Third, Fed QT is likely having as important if not more of an impact on markets as the ECB’s tapering desire. Remember that the ECB is talking about reducing the pace at which its balance sheet rises, while the Fed is talking about reducing its balance sheet. The default explanation has been to point the finger at the ECB for the rout in bonds, but the Fed should not be ignored.

Fourth, the market has retained its bias toward investing in bonds over equities. Positioning in the bond market has extended further since 2013, with more sovereign debt trading at lower negative yields and curves a lot flatter. Equities might have rallied but this has been one of the most unloved rallies in history. The potential for a positioning adjustment is greater than in 2013.

For now, bond markets are moving largely as one would expect when policy expectations adjust, and as long as this adjustment is orderly central banks will not modify/delay their plans. While central banks are cognisant as to how markets behave, they worry more about maintaining easy policy at a time when deflation risks have ebbed considerably, risk taking and animal spirits are once again exuberant, and there have been strong cumulative gains in growth/labour markets. Loose monetary policy is at risk of overstaying its welcome. Divyang.Shah@tr.com /db/kl/jb


NFP and G10 Trades: Levels, Ranges, Targets


50 year period ends, by crash or new market formations such as Bretton Woods in 1944, always experience since 1694 the greatest prosperity and boom times to remain at least 10 years. The window from start to end is 12 1/2 years. Prosperity is all encompasing as everybody on the planet prospers, markets trend nicely, threat of wars are gone and peace reigns. Current economic experiments by central banks supposed to fail in this last period. But it brings renewal later. Now is time to watch Gold trades over the long haul. A recommended read for market methodologies is the great investor from yesterday, Barnard Baruch. He knew periods as well as Gann. But periods are biblical from 49 years.

What the relationship in EUR/USD, EUR/JPY and USD/JPY informs is predictions for when crashes will occur, when prosperity begins and it predicts every market price on the planet from stock markets to bonds to currencies, interest rates. Its the all encompassing insight to world markets.

And again Non Farm Payrolls Range is 50,000, established in 1939 when the release began. Certain months maybe 49,000 or even 51,000 but 50,000 is solid. NFP inside the 50,000 interval then prices range. Outside then bottoms and tops break. Today’s number is 179,000 so range is 129,000 to 229,000. Range trades mean long bottoms and sell tops comfortably. Sadly, amongst all the analyst, nobody will enter the required data to forecast NFP correctly. Its easily by now 1000 numbers then calculations. Forget weekly hours or average earnings as those numbers haven’t moved in 78 years of Non Farm.

EUR/USD is miles overbought from averages 20 to 253 day. EUR/USD price currently is not only far to high but its setting up for the big fall. Its the range indicators to inform EUR/USD heads lower but overbought averages agree. Inside Current EUR/USD price is lost. Statistically, its called randomness. It can’t handle much higher. Its the opposite effect to recently reported AUD. AUD had to climb to relieve the range pressures. Same principle to EUR/USD but in the opposite direction. EUR/USD contains far more range movements than AUD so it didn’t take much higher for AUD to see normalcy again. EUR/USD can travel a bit more than AUD so it achieves overbought for days at times.

Here’s trades and again daily trades as the central banks trade the exact same levels, ranges and targets.

Big break line above is 1.1457. Watch the break below at 1.1373 then the bottom at 1.1357.

AUD/USD. Sits at dead center neutral. The big break line below is located at 0.7562 and 0.7534. Break here then far lower for AUD. Above overbought begins at 0.7618 then travels to scary overbought at 0.7634. Any price is this area is open game for shorts.

NZD/USD as the market signal pair sits in the same predicament as AUD. Big break lines are located at 0.7237 and 0.7178 then 0.7061. Range indicators reveal sell signals are here so sell tops.

Remember the British Tradition statement for currency pairs. Check out the most miserable currency pair on the planet to define its follow of the British tradition. What’s the British tradition, build supports and resistance levels to contain movements. The BOE are masters at containment. Its why EUR/USD is a far better currency pair to trade because its pure and movements are allowed.

Range break today 0.9746, big break line at 0.9770 then 0.9842. Today’s levels working down, 0.9655, 0.9647, 0.9624 then 0.9597. USD/CHF is far oversold so despite its contained disaster, long bottoms.

USD/JPY topside is located at 113.88, 114.32 and 114.77. Below 113.30.

EUR/JPY breaks above 130.18, 130.31, 130.62 and 130.94. Below Watch 129.18.

Poorly constructed GBP/USD at 1.2946 and 1.2975 defines either 1.2896 or 1.3026. The British way and here to remain forever without change. Money market traders have a field day while the exchange rate remains contained.

GBP/JPY. 146.65 or 147.23 defines either 147.23, and 147.56 or 145.28 and 144.99. GBP/JPY is far overbought while GBP/USD is dead neutral like its British cousins AUD and NZD.


Brian Twomey