An Unhealthy Obsession

The Federal Reserve now spends over 1/3 of its time talking about financial markets in the minutes. That’s more than trade, monetary policy & employment combined.
This unhealthy obsession has become a distraction – and it’s leading financial markets down a dangerous path.

Currency Krav Maga

There’s been a lot of discussion recently about $ strength preventing risk assets from making new highs. I don’t dispute the fact – it’s pretty obvious that we’re losing badly in the battle for competitive devaluation that global central banks have embarked upon. But it's even worse than the headlines might suggest.

To refer to this as a “USD bull market” is not correct. As others have correctly pointed out: it’s a bear market for $ funders. Typically, we’d see this manifest in overnight repo rates, but that’s not really happening. We might also see this show up in LIBOR/OIS spreads (and cross-currency basis) & it has, but to a fairly limited extent.

Where this is showing up instead is in FX forwards. In times of trade war, this is currency krav maga - the art of self-defense.

"Impossible" Events are on the Rise

A 4-sigma event would be expected to happen once or twice in a trading lifetime - according to the most popular VaR-based risk models. We’ve seen 10 of those this month in Treasuries. What we should have learned from the GFC has been all but forgotten. What the market had considered to be impossibilities (or at least highly unlikely...) is quickly becoming the norm.