• The US yield curve managed to steepen out of its inversion in both the 2s-10s and 5s-10s, but:
  • The curve is still very flat, and the financial stress it signaled by inverting should not be ignored; inversions tend to happen months in advance of a recession
  • Recession risk is now real, compounded by high levels of inflation in food and energy globally

• Commodities prices remain high even as they start to stabilize
  • WTI continues to yo-yo around $100, a level too high for a world contending with high inflation and growing recession risks
  • Wheat is still expensive, although it might be in the process of consolidating above $1000
  • Base metals prices remain bullish, with Copper pushing the top end of its range, Aluminum still >$3000, and Iron ore continuing to rally

• Global USD funding conditions are critical to how far financial contagion spreads, and how deep the recession gets
  • Demand for USDs remains stronger than it was at its low in the middle of last year, which implies that global USD funding conditions are getting tighter – not a good sign for the world economy, and NOT helped by war
  • USDCNY is the canary in the coal mine, and can tell us when stress levels in USD funding markets increase

• Higher energy, raw materials, and food costs feed into higher inflation all around the world. This combined with the flat/inverted US yield curve and stronger USD is stagflationary at best, deflationary at worst

Trading Ideas – Performance

Trading Ideas – Commentary

• Purchased a straddle on gold, using GLD options, to take advantage of gold trading in a tight range in the first week of April
  • 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
  • Did not put on an outright long position due to the uncertainty over which way gold would breakout of its range

• Entered into short positions in EURUSD (again) & GBPUSD
  • EUR, GBP are best candidates to short vs the USD now as they are looking more bearish than AUD and CAD
  • Need to wait for short term trend in AUD to realign with its medium term trend before taking a position

• 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%

• Long oil position did well (expressed via XLE in ETF Edge), and was also closed out due to volatility

• Exited straddle on TLT in anticipation of long yields turning lower, for a net gain of 18.4%
  • Now looking and waiting for long yields to make a top, before going short US long yields (long 10y/30y USTs)

Trading Ideas

• Long USD:
  • Well established trend, in place for >6 months in most major currency pairs
  • If global economic growth does take a turn for the worse in the near future, global USD funding markets will tighten, driving the USD even higher. War in Ukraine is NOT helping
    • US yield curve’s inversion (even as the Fed turns hawkish) has given us a clear warning sign
    • USDCNY has started to turn higher, hinting at worsening conditions
  • Serves as a broad hedge against other “risk” assets in your portfolio, like stocks. BUT:
    • Don’t think of the USD trade as “only” a hedge
    • It is entirely possible, and normal, for the USD to strengthen as equities rise. The 2nd half of 2021 provides a good example of this, where US equities rallied even as the Dollar broadly strengthened
  • USD longs in general should do well, but of the G7 currencies, look to go long the USD vs:
    • EUR
    • CAD
    • GBP
    • AUD

• 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

• Long Gold:
  • Gold has quite decisively broken out of resistance levels and looks strong technically
  • The geopolitical backdrop is also supportive of higher gold prices
  • Be wary of trading gold based on current high levels of inflation as it didn’t rally over the past few months on record breaking CPI data releases & headlines