A New Years Gift?

Here is my New Years Gift, in three parts.

Part One USD/RMB liquidity

On Dec 9th we shared this at a financial forum:  "it will be a USD/CNY rate above 6.45 or a USD/CNH rate above 6.50 that shakes up global markets, sending investors scurrying back into government bonds"

China devalued Aug 10, by Aug 25 CNH went from 6.21 to 6.51; +30 ticks for a sudden and steep devaluation. Since Oct 30th both CNH and CNY have steadily risen, today CNY is at 6.48 while CNH has gone from 6.32 to 6.57; +25 ticks for a slow devaluation of the almost same magnitude.  

Part Two – Record RRP

Yesterday repo rates on UST's went screaming above 60bps. Bare in mind that most repo is MBS and Agency, and conducted outside of reporting where the rates are substantially higher. Meanwhile Fed RRP (reverse repo) was paying 25bps. 

On Dec 20th we shared this at a financial forum: "I predict, just like the Dec commodities flash crash (in progress) and Q1 GDP going negative,  a record RRP volume the last week in Dec."

On 12/30 NYFED ON RRP was $277B; on 12/31 it hit $475B with 109 counterparties. As predicted, this SMASHED the old record of $385B set on Sept 30th.  And all those foreign official accounts are still running to the trough at the Foreign Fed RRP window (a completely separate pool from the OMO's). Every dollar going to these RRP's just keeps squeezing King Dollar BABY!!!!

RRP drains dollar liquidity, in this case foreign official and bank accounts deposit "dollars" for UST collateral, which effects offshore dollar liquidity. There is est. $1T held by the NY branches of FB's (foreign banks) funded with US and ED CD and CP issued to prime money funds, as well as interoffice loans from headquarters also funded by ED deposits and Euro/U.S. dollar basis swaps. Bottom line: As one of my mentor's Salmo Trutta might say, as the flow goes, if it goes into RRP (foreign or domestic), less available, squeeze harder.

Part Three – /ES (SP500 Futures) and /VX (VIX Futures)

/ES Dec 2013 high on 12/30 @ 1846; by Feb 3rd down -114 points to 1732  

/ES Dec 2014 high on 12/29 @ 2089; by Jan 6th down -105 points to 1984

/VX Dec 2014 went from 15.8 to 22.35 by Jan 16th +655 ticks

Last three days /VX a small rise on wafer thin trading 17.45 to 18.72. +127 ticks

Bottomline: Strain in dollar/Rmb liquidity seen through the on and off shore exchange rates. This is forcing alot of margin calls on dollar related carry and currency hedged trades. Strain in RP liquidity seen in the RP rate.  As for RRP, it jumps at quarter end to hide cash and have necessary collateral on hand, read window dressing for requirements. With the foreign banks continuing rise in RRP activity, this only creates further liquidity stress in foreign dollar markets.  I just have this sense that due to liquidity issues, this year the trade could be volatility, in fact I'm gonna go out on a limb, that might be the trade of the year in 2016.

As for Jan 4th, as shown above, last two years average loss of 100 pts from Dec high during Jan. A caveat, when the Sept 30th former record RRP "cash" came back into play, the SP500 went from 1861 to 2110 over the month of October. Food for thought.