Macro Edge #40
Originally posted on: thepensivenugget.com
The USD’s correction might be over, which may spark more chaos in global markets, especially if correlations remain high.
Is The USD’s Correction Over?
- USD weakness over the last 2 weeks may be over, as it looks to have turned against many currencies
- This may mark a shift back toward broader sell offs, or a chance to establish Dollar longs
- US 10y and 30y yields may have made their cyclical highs and could be turning lower as the global cycle shifts
- Yields can’t seem to make new highs even with record inflation and a very hawkish Fed (US 2y yields are in the same boat)
- 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 against a whole host of currencies
- 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
- 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 selling off, 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 ofstagflation, if not outright deflation
Trading Ideas - Performance
Trading Ideas - Commentary
- 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 looked to 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
Is the USD’s correction over?… EUR
- EUR has turned down from its recent highs ~1.078, although it is still too early to tell if its bounce is over
- It is currently testing support at 1.064
- The chart remains very bearish, and another test of 1.034 looks likely
Is the USD’s correction over?… GBP
- GBP’s bounce could also be over as it turned down after failing to breakout of 1.268 resistance
- It is currently testing support ~1.245
- The chart is still very bearish, and a break of 1.207 is still possible, which could lead to a fall to 2020’s low at 1.144
Is the USD’s correction over?… AUD
- AUD’s bounce vs the USD may also be over, although it hasn’t yet begun to really move lower
- Resistance lies at 0.7265, with support at 0.70
- Its broader trend is bearish; a break below 0.68 could see it drop to 0.64, and possibly 2020’s low at 0.55
Is the USD’s correction over?… CAD
- CAD is finding some bids just below its bullish channel
- Resistance lies ~1.287, with major support at 1.245
- The chart is still bearish, and CAD can’t sustain a rally even with WTI > 100
- Next major resistance lies at 1.305, then 1.339
Is the USD’s correction over?… CNY
- CNY has also made a possible interim high against the USD, establishing a new support level ~6.64
- A break of resistance at 6.75 to test 7.02 remains possible, which would not bode well for risk assets
US long yields bounce off support… US 10y
- US 10y yields bounced off support in the 2.7% region, and are attempting a push back to the 3% level
- Their recent high at 3.2% may be their highs for this cycle
- Global USD shortages could soon see USTs catch more bids
US long yields bounce off support… US 30y
- US 30y yields also bounced higher after catching bids below support at 3%
- They may also have made their cyclical highs ~3.3%, although a decisive break below 2.8% is needed to confirm this
The US yield curve struggles to steepen…
- US 2s10s remain range bound between 20–40 bps
- 5s10s are still flat ~0 bps
- The yield curve remains very flat, and inversions, no matter how brief, are clear signs of stress in the system
As US breakevens move slightly higher…
- Breakevens made a small move higher but remain in a pronounced downtrend, 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 stopped flattening for now, but remain off their steepest levels
- Are they finally aligning with other markets that are signaling a shift in the global cycle?
Oil breaks above 114, but not decisively…
- Oil managed to break above major resistance at 114, but could not hold on to its gains, and looks to be falling back into its range again
- March 7th still looks like a cyclical top, although supply remains tight vs demand
Copper holds steady in its range…
- Copper had a steady week of trading sideways
- It remains in its wide range, and a decisive break below 4.05 is needed to signal that global economic conditions are really deteriorating
Iron Ore still looks bullish…
- Iron ore is making a push to breakout of the top end of its range at 960
- It remains in its bullish channel, with major resistance standing at 1008 (last July’s high)
And Aluminium continues to sell off…
- Aluminium can’t catch any bids, and continues to move lower, with a test of major support at 2570 likely
Gold consolidates in the mid 1800s…
- Gold spent the last week moving around the upper end of its old bearish channel and its current uptrend, ~1850
- Resistance lies at 1880
- A decisive break below 1790 could see a fall to 1760, even 1690
As Wheat continues to fall
- Wheat continues to fall, and is approaching the bottom end of its range ~985
- Its price is heavily influenced by macro factors like war and politics right now, as governments scramble to respond to food shortages
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