• While the USD is no longer broadly correcting, its performance is diverging
  • Commodity currencies are still eking out gains against the USD, while EUR, GBP, and most importantly the CNY, have begun to consolidate

• US 10y and 30y yields look like they want to make a run to test their current cycle highs after rallying strongly, but
  • Long yields are struggling to make new highs even with record inflation and a very hawkish Fed
  • 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, and has been trending in this direction for about a year now
  • 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

• Commodity prices are also diverging
  • WTI is almost back at its Russian invasion highs
  • Base metals prices do not yet paint a decisive picture, with Copper still range bound, Aluminum very weak, and Iron ore bullish

• 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

• A painful week for the trading book. Gold has settled into a range, killing profits on our straddle, and US long yields have risen, pushing our long put position into the red

• 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 may 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

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