• The US yield curve between the 2s and 10s is very close to inverting, and remains inverted between the 5s and 10s
  • Indicating much reduced potential for long term growth-driven inflation, even as US breakevens stay elevated

• Volatility in Commodities remains high even as prices of the most affected commodities pull back a bit
  • WTI has fallen back to ~$100, which is still too high for a world contending with high inflation and a flattening/inverted US yield curve
  • 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 headed back to record highs, and Iron ore rallying 

• Global USD funding conditions are critical to how far financial contagion spreads:
  • 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
  • USD eased off in the past week, with CNY in particularly rebounding strongly vs the Dollar
  • Keep an eye on USDCNY for indications of increasing stress in USD funding markets, and the resulting increase in deflationary potential 

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

Trading Ideas – Performance

Trading Ideas – Commentary

• Long USD positions were stopped out due to volatility
  • 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%

• Might be wise to wait for better entry points in long USD and long gold positions, perhaps on retests of previous levels
  • EUR,GBP are best candidates to short vs the USD now as they are looking more bearish than AUD and CAD
  • AUD is trading at major resistance, which might offer an opportunity to go short if it fails to breakout

• 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 for confirmation that long yields have topped out, if not waiting for them to make their highs, 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 flattening, and now inverting 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 – given current strength, it would be wise to wait for the short term trend to realign with medium term bearishness before re-entering this position

• Long 10y or 30y US Treasuries:
  • Highs in yields (lows in price) might be in, though further confirmation is needed in the days and weeks ahead
  • 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