• 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%

Trading Ideas

• 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:
    • EUR
    • CAD
    • GBP
    • AUD
    • JPY

• 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