Macro Trading Opportunities: Dollar Ramages Higher

Macro Edge #42

Originally posted on thepensivenugget.com

The bounce is over, as the USD erases its May losses.

Problems grow by the day, with the US yield curve inverting again, EU debt troubles brewing, and high food and oil prices choking already weak growth.

Dollar Bulls Return, And They Mean Business

• European debt concerns have reignited with spreads between Italian and German bonds widening. The ECB held an emergency meeting to discuss the issue, but why isn’t anyone asking the crucial questions:
• How healthy is the European economy if the ECB is so worried that rising rates will spark a new debt crisis?
• If the economy is not healthy, with the ECB having just announced plans to raise rates (and not by a lot), how effective are their policies considering that they have held rates below 0% for so long?

• The USD rampaged higher over the past week, signaling an end to the short-lived rally in May
• 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 is
• 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

• US 10y and 30y yields blast higher, making new cycle highs, but
• With the Dollar continuing to rally, and the US yield curve re-inverting at some points, global markets are looking at further, and possibly steeper, sell offs

• Commodity prices continue their divergence
• WTI still has its Russian invasion highs in sight
• Base metals prices do not yet paint a decisive picture, with Copper still range bound, Aluminum very weak, and Iron ore bullish
• 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

• Re-entered EUR & GBP shorts on their technical breakouts, initiated a short in AUD as well

• Gold has turned down, but can’t seem to break lower with any real conviction, keeping our straddle in the red
• Decision to straddle gold using GLD options, instead of putting on an outright long position, can still pay 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

• Yields continue to rise, racking up large losses in our long TLT put position, but we purchased a year long expiry for this reason, to give the market time to make a top (if it does!)
• Went long TLT calls with 1 year expiry, as 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 are ominous signs

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, and mid June (even as the Fed turned hawkish) is 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 return with a vengeance… EUR

• EUR gave back all its May rally gains in just 3 trading sessions as the USD strengthened again
• It easily broke through 1.064 to reach key support at 1.034, where it bounced
• A break below will see new 5 year lows being made

USD bulls return with a vengeance… GBP

• GBP also capitulated against the USD, and briefly broke below 1.207 support to trade in the 1.19s
• It managed to bounce, but a test of 2020’s low at 1.144 is a real possibility in the near future

USD bulls return with a vengeance… AUD

• AUD has fallen back into the 0.68 region, where it managed to find support at its May low
• A break below 0.68 could see it drop to 0.64, and possibly 2020’s low at 0.55

USD bulls return with a vengeance… CAD

• CAD never reached major support at 1.245, and has reversed
• It is now trying to break out of resistance ~1.287–1.295, with further resistance at 1.305
• The trend is bearish, although CAD could be forming a wide range between 1.2314–1.305

USD bulls return with a vengeance… CNY

• CNY weakened vs the USD, and briefly tested 6.75 resistance, but failed to break higher
• A break of resistance at 6.75 could see a test of 7.02, which would not bode well for risk assets
• Support lies at 6.64

US long yields blast higher… US 10y

• US 10y yields blasted higher and above resistance at 3.25%
• Closest major resistance now lies ~3.6% — 3.7%, 2011’s highs
• Be wary if the USD continues to strengthen, as it could cause USTs to catch more bids

US long yields blast higher… US 30y

• US 30y yields have rallied to test resistance at 3.45%, 2018’s highs
• A break higher could see a test of 2014’s highs, ~4%

The US yield curve moves to re-invert…

• US 2s10s are back in the single digits and flirting with inversion again
• 5s10s have grown even more deeply inverted, ~ -10 bps
• The yield curve continues to signal high levels of stress in the financial system

As US breakevens remain off their highs…

• Breakevens remain in a pronounced downtrend even with the CPI stubbornly high
• The market is clearly concerned about the lack of growth driven inflation here

European yield curves continue diverging…

• French & Italian curves have continued to steepen, even as the German curve keeps flattening
• This has reignited concerns over Italian debt, reviving the specter of the European debt crisis

Oil has yet to reach its February high…

• Oil has so far failed to test its Feb highs, now at 123 with the rolling of futures contracts, and looks headed for a test of support at 111.5
• Will March 7th hold as a cyclical top?

Copper moves to the bottom of its range again…

• Copper fell to ~4.11, near the bottom of its range, but did not test 4.05
• A decisive break below 4.05 is needed to signal that global economic conditions are really deteriorating

Iron Ore starts to consolidate near major resistance…

• Iron ore spent the last week consolidating between support at 960, and major resistance at 1008 (last July’s high)
• The trend remains bullish, and another attempt to breakout of 1008 seems likely at this point

As Aluminum dips below major support…

• Aluminum has resumed crashing, and briefly dipped below major support at 2570

Gold turns down after failing to break above 1880…

• Gold pushed to test resistance at 1880 but failed to breakout and fell to support ~1800
• It is now trading ~1830, but a decisive break below support at 1790 could see a fall to 1760, even 1690

And Wheat trades in a tight range above 1000

• Wheat has stabilized between 1000–1100, but remains very expensive
• The threat of global food shortages, and the unrest it brings, increases daily