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.
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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