• The US yield curve between the 2s and 10s inverted last week, and remains inverted between the 5s and 10s
  • Recession risk is now real, compounded by high levels of inflation in food and energy globally

• Commodities prices remain high even as they start to stabilize
  • WTI is back below $100, but is still too high for a world contending with high inflation and growing recession risks
  • Wheat is still expensive, although it has come back down to ~$1000
  • Base metals prices remain bullish, with Copper pushing the top end of its range, Aluminum still >$3000, and Iron ore continuing its rally

• Global USD funding conditions are critical to how far financial contagion spreads, and how deep the recession gets
  • Demand for USDs remains stronger than it was at its low in the middle of last year, which implies that global USD funding conditions are getting tighter – not a good sign for the world economy, and NOT helped by war
  • USDCNY is the canary in the coal mine, and can tell us when stress levels in USD funding markets increase

• Higher energy, raw materials, and food costs feed into higher inflation all around the world. This combined with the inverted US yield curve and stronger USD is stagflationary at best, deflationary at worst

Trading Ideas – Performance

Trading Ideas – Commentary

• Entered into short positions in EURUSD (again) & GBPUSD
  • EUR,GBP are best candidates to short vs the USD now as they are looking more bearish than AUD and CAD
  • Need to wait for short term trend in AUD to realign with its medium term trend before taking a position

• Long USD positions were stopped out due to volatility
  • Initial EURUSD short closed for a gain of 3.83%
  • AUDUSD short was stopped out at 0.7285 for a loss of -2.03%
  • USDCAD long closed out for a gain of 0.66%

• Long oil position did well (expressed via XLE in ETF Edge), and was also closed out due to volatility

• Exited straddle on TLT in anticipation of long yields turning lower, for a net gain of 18.4%
  • Now looking and waiting for long yields to make a top, before going short US long yields (long 10y/30y USTs)

Trading Ideas

• Long USD:
  • Well established trend, in place for >6 months in most major currency pairs
  • If global economic growth does take a turn for the worse in the near future, global USD funding markets will tighten, driving the USD even higher. War in Ukraine is NOT helping
    • The now inverted US yield curve (even as the Fed turns hawkish) is providing a clear warning sign
    • USDCNY has started to turn higher, hinting at worsening conditions
  • Serves as a broad hedge against other “risk” assets in your portfolio, like stocks. BUT:
    • Don’t think of the USD trade as “only” a hedge
    • It is entirely possible, and normal, for the USD to strengthen as equities rise. The 2nd half of 2021 provides a good example of this, where US equities rallied even as the Dollar broadly strengthened
  • USD longs in general should do well, but of the G7 currencies, look to go long the USD vs:
    • EUR
    • CAD
    • GBP
    • AUD

• Long 10y or 30y US Treasuries:
  • Yield curve inversion points towards the end the current economic growth cycle, which means that nominal yields will start to turn down soon
  • Monthly & yearly trends in yields are bearish, and looking for an opportunity to short yields is in alignment with long term trends
  • Trade can be expressed:
    • Long TLT, or long TLT Calls
    • Long US T Note/Bond Futures, or long Calls on Futures

• Long Gold:
  • Gold has quite decisively broken out of resistance levels and looks strong technically
  • The geopolitical backdrop is also supportive of higher gold prices
  • Be wary of trading gold based on current high levels of inflation as it didn’t rally over the past few months on record breaking CPI data releases & headlines