Macro Trading Opportunities: Strong Dollar, More Pain

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

Macro Edge #37

Originally posted on thepensivenugget.com

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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DISCLAIMER:

The information herein is for assistance and informational purposes only. It is not intended to be, and must not be taken alone as a basis for investment and/or trading decisions. Each recipient of this information should engage in their own due diligence process at the consult of their own legal, financial, accounting, regulatory, and tax advisors. You are solely responsible for any trading or investment decisions that you make.