Jan 11. Abe continues to crush yen. Draghi stands pat. New Fed decidedly dovish.

–US interest rates rose as the ECB refrained from cutting rates and the US treasury auctioned 30’s. Tens up 4 bps to 1.892. The curve steepened; some deferred eurodollar calendar spreads notched new highs, for example red/green pack spread up just over 2 bps to new recent high of 33.
–The euro soared yesterday, especially against the yen. EURJPY up over 2 big figures to 116.90 and this morning at 118 as Abe announced a 10.3T yen stimulus package. Also this morning China inflation figures higher than expected. Inflation (or lack thereof) is becoming a theme. My bet is that Abe will beat it in Pyrrhic victory. At least he knows what he’s trying to do. In the US Kocherlakota indicated Fed policy might be too tight considering lack of inflation. In contrast Esther George, (KC Fed Pres, new voting member) outlined risks of inflation and other possible imbalances from easy monetary policy. The press seems to think she’s the new ‘hawk’ filling Lacker’s shoes, but I read yesterday’s speech and thought it was tepid. I personally don’t conclude that she will become the ‘dissenter’. Against other new Fed voters though, like Evans of Chicago, she may look absolutely Santelli. (Though Bullard could yet lean more hawkishly, also voting this year).
–When you read the Dec Fed minutes, it’s peppered with “one member” or “one participant” who either objected, voiced concern, or indeed “viewed additional purchases as unwarranted”. Lacker. It’s like the cartoon with the exasperated jury foreman sticking his head out the door to order lunch: “11 turkey sandwiches and 1 cheeseburger. 11 Cokes and 1 Dr Pepper…” The point is that this new Fed leans dovish, we lack Lacker, and the market may yet test them with a steeper curve, perhaps sparked at the margin by Japan’s experiment, or by China’s mismangement.

Posted on January 11, 2013 at 5:19 am by alexmanzara · Permalink
In: Eurodollar Options

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