• The USD has surged higher after largely treading water over the past few weeks, pushing it to continue its strengthening trend
  • 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
  • Commodities aren’t broadly weaker, but commodity currencies, AUD and CAD, are not doing well. Especially CAD which can’t rally vs the USD, even as WTI approaches $100 a barrel

• Interest rates have fallen but important markets still aren’t indicating much potential for long term growth-driven inflation:
  • The US yield curve keeps flattening, and US breakevens stay off last year’s highs

• WTI is now a whisker away from $100, which could be the last straw that sends the world economy into recession
  • Higher energy costs feed into higher production costs all around the world
  • This combined with the flattening US yield curve and stronger USD is stagflationary at best, deflationary at worst

Trading Ideas – Performance

Trading Ideas – Commentary

• Long USD positions are doing well as the Russian invasion pushes the Dollar to continue its broad strengthening trend

• Long oil position is doing well (expressed via XLE in ETF Edge), with the war exacerbating already tight supply conditions

• Decision to straddle US 30y rates rather than take an outright long or short position is paying off as the volatility in long yields increases
  • Given the current geopolitical situation, it is looking unlikely that long yields will spend the next few months trading in a narrow range
  • The trade is poised to profit if the Russian-Ukrainian war keeps driving long yields lower, AND also if the war is resolved quickly and long yields continue their upward trend

• Might be wise to wait for better entry points in short GBPUSD and long gold positions, perhaps on retests of previous levels

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
    • The potential for this downturn is currently underestimated, especially in the mainstream media
    • The flattening US yield curve (even as the Fed turns hawkish) and poor Chinese economic data provide clear warning signs
    • Look for USDCNY to turn higher, i.e change its trend, for an indication of 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
    • AUD
    • CAD
    • GBP

• Straddle US 30y rates:
  • 30y yields look poised for either a break above 2.17% towards 2.5%, or to fall back and test 1.67%
  • This strategy will also profit from a fake out/bull trap, i.e if the 30y breaks above 2.17% but quickly falls back down
  • Downside comes from 30y yields trading sideways for a prolonged period of time; and straddles are expensive strategies since they involve purchasing puts and calls
  • Trade can be executed:
    • With options on US T Bond futures, or options on the TLT ETF
    • Or going long in the spot market, either with actual T Bonds or the TLT, and hedging the other direction with puts/calls; which would be a less aggressive strategy

• Long Oil:
  • Strong trend and sustained levels of bullishness makes WTI an attractive long
  • This view has been expressed with a long position in XLE, as detailed in ETF Edge

• 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