Macro Trading Opportunities: Strong Dollar, More Pain

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

Macro Edge #37

Originally posted on

Risk assets beware! Global USD shortages have begun, signaling a turn in the global economic cycle. Stagflation, if not outright deflation, is now likely.

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Risk Assets Beware: Global USD Shortages Have Begun

  • 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%

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
  • Trade can be expressed:
    - Long TLT, or long TLT Calls
    - Long US T Note/Bond Futures, or long Calls on Futures

USD shortages have begun… EUR

  • EUR is still very weak, having broken below its 2017 uptrend and 2020’s low at 1.064
  • It is now testing intermediate support ~1.049; a break below will see a retest of 2017’s low at 1.034

USD shortages have begun… GBP

  • GBP is also looking very weak
  • Having broken below its bearish channel, it is now approaching intermediate support at 1.207
  • A downside break of this level could see a sharp fall to 2020’s low at 1.144

USD shortages have begun… AUD

  • AUD’s short term trend has clearly realigned with its medium term one, with both now bearish
  • It has broken below critical support at 0.70, and is likely to test support at 0.68 soon

USD shortages have begun… CAD

  • CAD has broken above major resistance at 1.295 and is looking weak against the USD again, even with WTI consolidating above $100
  • Next major resistance lies at 1.339

With CNY at the heart of it…

  • CNY has broken out of its bearish channel and is drastically selling off vs the USD
  • It is currently testing resistance at 6.75, a break of which could see a move to 7.02
  • This does not bode well for risk assets

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

  • US 10y yields are faltering close to major resistance at 2018’s double top, ~3.25%, and closest support lies at 2.77%
  • Further gains are possible, but global USD shortages could soon see USTs catch a strong bid

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

  • US 30y yields are also high but faltering, now trading slightly above 3%, some distance away from major resistance at 3.45%

As the US yield curve steepens but remains flat…

  • The US yield curve has steepened slightly since its inversion in April
  • 2s-10s are volatile ~30 bps, with 5s-10s at ~2 bps
  • It still remains very flat, and inversions, no matter how brief, are clear signs of stress in the system

US breakevens are plummeting…

  • Breakevens are plummeting, and are back below November 2021 levels even as inflation remains stubbornly high
  • The market is clearly concerned about the lack of growth driven inflation here

European yield curves remain steep vs the US…

  • The dissonance between US and European yield curves continues,with major European curves still at their steepest levels post COVID
  • A reversal of this could happen soon, as CNY’s crash heralds a shift in the global cycle

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

  • Oil is still trading in a wide range, between $92-$116, with March 7th looking like a cyclical top
  • But, supply is still tight vs demand, although global USD shortages & oil > $100 should lead to demand destruction

Copper slides to the lower end of its range…

  • Copper has sold off to 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 consolidates, but still looks bullish…

  • Iron ore remains in its bullish channel, but has spent the past month trading in a wide range
  • Resistance now stands at $961 and $1011 (last July’s high)

Aluminium sells off and is starting to look weak…

  • Aluminium prices have come down in tandem with copper, albeit more drastically
  • It is now trading below $3000, with major resistance at $2570

Gold tumbles after failing to break above $2000 again…

  • Gold has fallen back to the mid $1800s after its failed attempt to push above $2000
  • It has caught some support from its uptrend at current prices
  • Resistance lies at $1875, with major support ~$1800

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