• Volatility in Commodities remains high as most have rallied again after falling heavily last week
  • WTI is back > $110, which is still too high for a world contending with high inflation and a flattening/inverted US yield curve
  • Grains are still expensive, especially wheat
  • Base metals prices are also increasing, with Copper pushing the top end of its range, and Aluminum headed back to record highs 

• Global USD funding conditions are tightening:
  • 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
  • CNY is also starting to noticeably weaken against the USD, as interbank funding spreads increase. If this continues, it could mark the start of a global deflationary trend

• The US yield curve keeps flattening between the 2s and 10s, and has inverted between the 5s and 10s
  • Indicating reduced potential for long term growth-driven inflation, even as US breakevens stay elevated

• 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%

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

• 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 long yields continue their upward trend

• 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

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 potential for this downturn is currently underestimated, especially in the mainstream media
    • 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

• 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 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