Macro Trading Opportunities: Dollar Slows, But Still Strong
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Risk assets managed a small rally, although they turned violently again yesterday.
Regardless, the USD is marching higher, as more and more markets begin to show that something is very wrong in the global economy.
- Most currencies bounced vs the USD over the last week, and risk assets followed; but global trends point towards a global USD shortage, and more markets are beginning to reflect this
- The USD is broadly stronger against a whole host of currencies, with global USD funding conditions clearly tightening
- Global USD funding conditions are critical to how far financial contagion spreads, and how deep the recession gets
- USDCNY is crashing, having moved from 6.4 to 6.75 in just 3 weeks. Stress levels in USD funding markets are obviously high, and are still increasing
- CNY’s shift, and it being one of the last to weaken vs the USD, heralds a shift in the global cycle – this does not bode well for economic growth and risk assets
- US long yields remain high as the market still seems intent on pricing in high inflation, but how long can this last?
- A natural consequence of global USD shortages is USTs catching strong bids
- Commodities are starting to price in deteriorating economic conditions around the world
- WTI is still range bound and hasn’t been able to retest its Russian invasion highs
- Base metals prices are beginning to turn, with Copper now near the bottom of its range, Aluminum <$3000, and Iron ore consolidating in a wide range
- More expensive energy, raw materials, and food costs, combined with a global USD shortage, increases the likelihood of stagflation, if not outright deflation
Trading Ideas – Performance
Trading Ideas – Commentary
- Decision to straddle gold using GLD options, instead of putting on an outright long position, has paid off with gold tumbling after failing its retest of $2000
- At this point, biggest risk to the trade is if gold settles into a tight range again (which it has done quite often of late), with little volatility
- Short positions in EURUSD (again) & GBPUSD are paying off as global USD shortages grow worse, with the USD well bid across the board
- AUD is now a decent short with its short term trend having realigned with its medium term one, and with the currency having broken below its 2020 COVID low
- Looking and waiting for US long yields to top out before purchasing USTs (10y and/or 30y), which is looking more likely now that CNY has started to crash
- Watching the 10y’s 2.71% support level very closely. A break below could signal that 10y yields have peaked
- Previous 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%
- Exited straddle on TLT in anticipation of long yields turning lower, for a net gain of 18.4%
- Long USD:
- Well established trend, in place for >11 months in most major currency pairs
- Recent sharp increases in the Dollar’s value signals that global economic growth is going to take a turn for the worse. Global USD funding markets will tighten even more, driving the USD even higher
- US yield curve’s inversion in early April (even as the Fed turned hawkish) gave us a clear warning sign
- USDCNY has started to move higher rapidly, indicating high levels of stress in global USD funding markets
- USD longs in general should do well, but of the G7 currencies, look to go long the USD vs:
- Long 10y or 30y US Treasuries:
- Yield curve inversion (2s10s in early April, 5s10s earlier) signals the coming end of 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
- Pay attention to 10y yields, and if they break below 2.71% support
- Trade can be expressed:
- Long TLT, or long TLT Calls
- Long US T Note/Bond Futures, or long Calls on Futures
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