Although the Super Bowl is long past us and the sports pages are now dominated by (delete as appropriate) NCAA basketball/Champions League/spring training/Man U takeover talk, Macro Man cannot get the familiar quarterback cadence (cunningly used as the title of today's post) out of his head.

As highlighted in this space yesterday, the market is aflame with rumours today that China will imminently hike either the RRR, its policy interest rates, or both. And not before time, in fairness. With CPI at 2.7%, the benchmark one year deposit rate (currently at 2.25%) is now comfortably negative. Nooooottttttt exactly what you'd call "appropriate" in an economy that rang up a 10.7% y/y growth rate in Q4.

Compare PBOC's lassitude with that of Malaysia's Bank Negara, which a week ago surprised markets by hiking 25 bps, taking its benchmark policy rate to 2.25%. While that is still pretty low, it's at least maintained a positive real interest rate; the last Malaysia CPI print was 1.3% y/y. And of course, the MYR has actually been permitted to strengthen this year (USD/MYR is down 4% already.) Oh, and Malaysia's GDP growth, while robust, is "just" 4.5% y/y....nowhere near China's.
Small wonder, then, that Barack Obama hit the tapes yesterday calling on China to quit...er....taking the piss. Might this have implications for the forthcoming Treasury "currency manipulation" report? Inquiring minds want to know....

In the US, meanwhile, every day that passes brings us a day closer to the first positive payroll figure, the draining of excess reserves, and, eventually, rate hikes. The last of these outcomes may still be some time away, in fairness. But still...Macro Man has had an uneasy feeling for some time that there was little risk premium priced into the eurodollar strip.

So he was very interested indeed sent him the chart below of eurdollar midcurve vol (essentially, the vol on shorter-dated options on longer-term eurodollar contracts.) While the absolute number may be high, the trend has been all one way, and there is now less of a "volatility premium" in this market than at any point in the last year...even as other CBs are starting to hike and the Fed itself is rumbling about exit strategies.
While some flow has already gone through the market, picking up some midcurve downside certainly doesn't look like the worst trade in the world, as a "bottom of the drawer" lottery ticket if nothing else. And if Ben Bernanke ever decides to act like Peyton Manning....well, the trade would score a touchdown.

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