Sep 29, 2022·edited Sep 29, 2022Liked by Alfonso Peccatiello (Alf)
A brief comment on the UK mortgage market – the reason so many loans are <5 yr fixed is because we only have the option of 2 or 5 year fix! Only very recently have we had 10 year fixed rate mortgages available, and only from a few lenders.
Mortgage products >5 years just don't really exist in the UK.
Alfonso, thank you so much for your comprehensive and brilliant analysis.
As you point out, the bond market is anticipating that the central banks are overtightening and ultimately interest rates will need to be lowered in order to restore health to the global economy.
However, lower rates are not possible until inflation comes under control. Of course, global wealth destruction will be helpful in suppressing demand and inflation, and we may be in a deflationary world in just a few quarters.
I am wondering what is the long game is in the United States with respect to interest rates. Unlike Paul Volcker who could raise interest rates In an economy that was 30% debt to GDP, Powell is constrained by 100% debt to GDP. In addition the average maturity of US debt is just five years and 30% of US debt is provided by foreigners, inferior positions relative to Volcker’s situation.
Is it possible that the United States implements yield curve control? With 30 trillion in debt, a 5% borrowing cost would result in the United States having interest expense is the largest line item on its annual budget.
But, isn’t yield curve control inflationary? (It was in the US in the 40s).
I’m wondering if yield curve control (perhaps under a different name) is the most likely outcome, once the fed funds rate exceeds inflation.
The framework is obviously right but reality is that YTD all currencies, other than the RUB, have been hit by USD strength. take NOK, with Norway being the most solid country in the world, still down 22% pretty much like the GBP. Take SEK, excellent current account, no twin deficit, AAA and is down 24%. the Swiss Franc itself is down 6-7% vs the USD. The EUR 15% down. And people are not buying dollar because of the current account position of the US or the fiscal discipline or the low leverage. i think we are seeing investors looking at strategic relative growth differentials and the US are much better placed than anyone else in terms of returns and RISKS (financial, economic, geopolitical, energy, etc...)
Counterargument on the Swiss Franc: If the SNB wants inflation more than an ever-stronger currency, then the SNB wants the Franc to drop and is not a great long side if paired with a defended G7 currency.
Have been a fervent reader of your stuff for quite some time now and, while i do love it, as a 30y FX veteran, i cannot let you write CHFGBP !! Sterling is quoted directly vs the Swissy man 😉
I’m guessing your friend Andreas Steno has been having a heart attack too.
In the tactical portfolio, how do you size positions and how do you set stop loss and take profit? I try to understand from the excel screenshot but don't completely get it. is it explained somewhere?
Always a great perspective Alf. I think the US 30 fixed rate mortgage is something that few appreciate as it is atypical. One of the things I have noticed is that most other countries have short term mortgages reset periodically. With inflation and mortgage rates spiking this is problematic for global real estate and implicitly FX.
As always much appreciated. Brilliant insight into the fundamentals that might drive prices in the near future. Interestingly BNP published a report earlier this year. Stating an increased risk of wide spread civil unrest in the U.K if wealth discrepancies continue to grow. And sadly I think this winter we will see that play out. Terrible, just terrible.
Impressive analyis, even though I am not familiar at all with the FX market. I really enjoy reading about what is happening around the world. Great insights. Appreciated.
With the big ranking difference between EUR and DKK, do you think there is a chance that DKK would be forced to break away from the hard peg to EUR, and what would that look like?
A brief comment on the UK mortgage market – the reason so many loans are <5 yr fixed is because we only have the option of 2 or 5 year fix! Only very recently have we had 10 year fixed rate mortgages available, and only from a few lenders.
Mortgage products >5 years just don't really exist in the UK.
Alfonso, thank you so much for your comprehensive and brilliant analysis.
As you point out, the bond market is anticipating that the central banks are overtightening and ultimately interest rates will need to be lowered in order to restore health to the global economy.
However, lower rates are not possible until inflation comes under control. Of course, global wealth destruction will be helpful in suppressing demand and inflation, and we may be in a deflationary world in just a few quarters.
I am wondering what is the long game is in the United States with respect to interest rates. Unlike Paul Volcker who could raise interest rates In an economy that was 30% debt to GDP, Powell is constrained by 100% debt to GDP. In addition the average maturity of US debt is just five years and 30% of US debt is provided by foreigners, inferior positions relative to Volcker’s situation.
Is it possible that the United States implements yield curve control? With 30 trillion in debt, a 5% borrowing cost would result in the United States having interest expense is the largest line item on its annual budget.
But, isn’t yield curve control inflationary? (It was in the US in the 40s).
I’m wondering if yield curve control (perhaps under a different name) is the most likely outcome, once the fed funds rate exceeds inflation.
Thank you so much for your time and insights.
The framework is obviously right but reality is that YTD all currencies, other than the RUB, have been hit by USD strength. take NOK, with Norway being the most solid country in the world, still down 22% pretty much like the GBP. Take SEK, excellent current account, no twin deficit, AAA and is down 24%. the Swiss Franc itself is down 6-7% vs the USD. The EUR 15% down. And people are not buying dollar because of the current account position of the US or the fiscal discipline or the low leverage. i think we are seeing investors looking at strategic relative growth differentials and the US are much better placed than anyone else in terms of returns and RISKS (financial, economic, geopolitical, energy, etc...)
Ciao Alfonso and the Macro compass community !
Thanks a lot for the materials provided on this space, either article and comments !
Once again, I need your knowledge! Could you share ideas for books, courses, conferences, ... to learn more about forex and its ecosystem?
Counterargument on the Swiss Franc: If the SNB wants inflation more than an ever-stronger currency, then the SNB wants the Franc to drop and is not a great long side if paired with a defended G7 currency.
Great content. More please.
Have been a fervent reader of your stuff for quite some time now and, while i do love it, as a 30y FX veteran, i cannot let you write CHFGBP !! Sterling is quoted directly vs the Swissy man 😉
I’m guessing your friend Andreas Steno has been having a heart attack too.
Why CHF and not NOK against the GBP? :)
In the tactical portfolio, how do you size positions and how do you set stop loss and take profit? I try to understand from the excel screenshot but don't completely get it. is it explained somewhere?
I'm remaining a bit cautious on that CHFGBP long. I'm seeing price come down into the 0.8511 price area. From there, I feel like we could go long.
Nonetheless, Alf, thank you so much for this break down. I'm loving these world-class reviews!
Does "short BTP/Bund spread" mean betting on the spread getting more narrow, or wider? Not sure if I get the "short spread" meaning correctly ^^
Yes impressive Alf. Thank you.
Always a great perspective Alf. I think the US 30 fixed rate mortgage is something that few appreciate as it is atypical. One of the things I have noticed is that most other countries have short term mortgages reset periodically. With inflation and mortgage rates spiking this is problematic for global real estate and implicitly FX.
EUR: the analysis would be similar to GBP, I assume?
As always much appreciated. Brilliant insight into the fundamentals that might drive prices in the near future. Interestingly BNP published a report earlier this year. Stating an increased risk of wide spread civil unrest in the U.K if wealth discrepancies continue to grow. And sadly I think this winter we will see that play out. Terrible, just terrible.
Impressive analyis, even though I am not familiar at all with the FX market. I really enjoy reading about what is happening around the world. Great insights. Appreciated.
With the big ranking difference between EUR and DKK, do you think there is a chance that DKK would be forced to break away from the hard peg to EUR, and what would that look like?