Macro Trading Opportunities: Strong Dollar, More Pain
Click on the slides above and press CTRL+SHIFT+F to view in full screen. If the slides aren’t loading, you can read Macro Edge over here.
Risk assets beware! Global USD shortages have begun, signaling a turn in the global economic cycle. Stagflation, if not outright deflation, is now likely.
- 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
- 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
- Trade can be expressed:
- Long TLT, or long TLT Calls
- Long US T Note/Bond Futures, or long Calls on Futures
Do You Want To Make Money Trading?
Learn how to, and more, in our Trading Courses.