Macro Trading Opportunities: Is Dollar Weakness Over?
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The USD’s correction might be over, which may spark more chaos in global markets, especially if correlations remain high.
- USD weakness over the last 2 weeks may be over, as it looks to have turned against many currencies
- This may mark a shift back toward broader sell offs, or a chance to establish Dollar longs
- US 10y and 30y yields may have made their cyclical highs and could be turning lower as the global cycle shifts
- Yields can’t seem to make new highs even with record inflation and a very hawkish Fed (US 2y yields are in the same boat)
- Together with the broadly stronger USD and flat yield curve, global markets are looking at further, and possibly steeper, sell offs
- The USD is broadly stronger against a whole host of currencies
- Stress levels in USD funding markets are obviously high, and still increasing
- Global USD funding conditions are critical to how far financial contagion spreads, and how deep the recession gets
- USDCNY is very weak and looking bearish. CNY’s shift, and it being one of the last to weaken vs the USD, heralds a shift in the global cycle, which does not bode well for economic growth and risk assets
- 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 selling off, 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
- Closed short positions in EURUSD & GBPUSD as the USD corrects
- Looking to re-enter EUR & GBP shorts on the next technical breakout
- 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
- 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
- Went long TLT calls with 1 year expiry, as US long yields looked to have topped out, and strong bids for USTs look to be on the horizon as the global cycle shifts
- Stronger USD, with significantly weaker CNY is a huge warning signal
- Flat/re-inverting yield curve and plummeting breakevens
- 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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