Macro Trading Opportunities: Dollar Slows, But Still Strong

  1. Long USD
  2. Long 10y or 30y US Treasuries

Macro Edge #38

Originally posted on

Risk assets managed a small rally, although they turned violently again yesterday.

Regardless, the USD is marching higher, as more and more markets begin to show that something is very wrong in the global economy.

If you would prefer to read this article in a slideshow format, you can do so here.

USD Takes A Break, But Remains In The Ascendancy

  • 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

USD bulls take a breather, but remain ascendant… EUR

  • EUR fell to retest 2017’s low at 1.034, where it managed to bounce back to ~1.05
  • The chart is extremely bearish, and more lows look likely, especially if support at 1.034 does not hold

USD bulls take a breather, but remain ascendant… GBP

  • GBP failed to reach 1.207 before bouncing
  • It remains between major support and resistance at 1.207 and 1.268 respectively
  • The chart is very bearish, and a break of 1.207 could see a fall to 2020’s low at 1.144

USD bulls take a breather, but remain ascendant… AUD

  • AUD came close to testing support at 0.68 before rallying back up to the key 0.70 level
  • A break below 0.68 could see it drop to 0.64, opening the door to a test of 2020’s low at 0.55

USD bulls take a breather, but remain ascendant… CAD

  • CAD also staged a small rally, with the USD weakening to ~1.28 after last week’s push above 1.30
  • The chart is still bearish, and CAD can’t sustain a rally even with WTI > $100
  • Next major resistance lies at 1.339

USD bulls take a breather, but remain ascendant… CNY

  • CNY broke above 6.75, but could not follow through
  • It is now hovering there after almost a month of relentless selling
  • A break higher to test 7.02 remains possible
  • This does not bode well for risk assets

US long yields remain high amidst market turmoil… US 10y

  • US 10y yields remain below major resistance ~3.25% (2018’s double top)
  • While yields could still break higher, watch for a break of support in the 2.71% — 2.77% area, as global USD shortages could soon see USTs catch a strong bid

US long yields remain high amidst market turmoil… US 30y

  • US 30y yields also remain a fair distance from major resistance at 3.45%, as they have so far failed to rally out of their bullish channel
  • Watch for a break below support at 3%

As the US yield curve struggles to steepen…

  • US 2s-10s continues to be volatile between 20–40 bps, and 5s-10s have now flattened back to ~0 bps
  • The yield curve remains very flat, and inversions, no matter how brief, are clear signs of stress in the system

And US breakevens still look weak…

  • Breakevens remain way off their peak, even as inflation (CPI) remains stubbornly high
  • The market is clearly concerned about the lack of growth driven inflation here

Have European yield curves reached an inflection point?

  • European yield curves have moved lower over the last week, with Germany’s in particular coming down sharply
  • Are they finally aligning with other markets that are signaling a shift in the global cycle?

Oil stays above $100, but is still stuck in a range…

  • Oil remains stuck in a wide range between $90-$114, with March 7th still looking like a cyclical top
  • Supply is still tight vs demand, although global USD shortages & oil > $100 should lead to demand destruction

Copper hovers at the lower end of its range…

  • Copper is still moving along the bottom of its range ~$4.15
  • A decisive break below the $4.05 level will signal that global economic conditions are really deteriorating

Iron Ore keeps trading sideways, but still looks bullish…

  • Iron ore remains in its bullish channel, but remains stuck in a wide range between 825–961
  • Major resistance still stands at $1011 (last July’s high)

Aluminium continues to look weak…

  • Aluminium prices remain far off their highs, and still look likely to test major support at 2570 sooner rather than later

Gold continues to languish ~$1800…

  • Gold broke below its uptrend and tested $1790, where it found support
  • It is now hugging support ~$1800
  • A decisive break below $1790 could see a fall to $1750, even $1684
  • Resistance lies at $1875

And Wheat is rallying again

  • Wheat has broken above 1164, and a test of March highs at 1318 is now possible
  • High wheat & fertilizer prices will only compound the world’s low growth + high inflation misery

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