Views are my own. Just my thoughts on macro markets. Not investment advice.
USD is still lacking follow through.
Given the string of strong US data, the sharp repricing higher of US rates and yesterdays 2% S&P500 sell off it still seems strange that USD hasn’t been able to rally further. There seems to be a lack of follow through. Given that all the catalysts to support my USD higher view have already happened I now feel cautious of sticking to the view without a clear driver to give it another leg.
Either the USD is lagging the move in rates and has significant catching up to do. Or the bias for USD is lower and as soon as US rates stop supporting the move it will turn sharply lower.
US rates now seem fairly priced with a 5.35% terminal rate and 5.15% for December 2023. With 29bps priced for the next meeting I now see a risk for pricing to come lower if tonight’s FOMC minutes confirm that the Fed still likes to move in 25bps steps. Powell has suggested that he prefers to move in smaller steps and has emphasised that it is the “extent” of rate hikes that is now important, not the pace. This shift in FOMC thinking likely still holds at these levels and if the minutes confirm that it is only the ultra-hawks (and non-voters this year) Mester and Bullard in support of 50bps then US rates could pull back in the short term.
Medium term I still feel that the Fed will be forced to put additional pressure on the market to stem inflation pressures. Inflation pressures have been allowed to re-emerge as financial conditions eased significantly from November to February. This has reignited animal spirits and this is now being seen in market price action, rallying meme stocks and crypto, and is now being seen in the hard data, NFP and ISM. The market has now realised this and is pricing the Fed slightly above its December SEP projections so the pricing seems fair to me for now.
I have taken profit on my USDJPY long and my AUDUSD short for now. I look to sell rallies in AUDUSD for the medium term at 0.6920 with a stop through 0.7050. USDJPY I will leave alone for now as we have the risk of Ueda’s testimony Friday and Japan CPI tomorrow night. I actually do not see a risk of a change of policy from the BOJ anytime soon but I am concerned that US rates might stop supporting the move higher in USDJPY in the short term.
I have gone long XAUUSD here at 1834.00 with a 1800.00 stop loss. My view for 2023 is still one of stagflation being the most likely scenario. I therefore like USD, XAU and CHF as the lead safe havens in this environment. As long as the Fed is hawkish USD will outperform but given US rates have come far enough in the short term I feel more comfortable entering XAUUSD long here. I still like to be short growth currencies medium term but I am waiting for rallies in AUD and NZD to sell into now.
The recent rhetoric out of Putin and Lukashenko has been concerning. The West has been increasing their support for Ukraine with Zelenskyy meeting several leaders in Europe and Biden visiting Zelenskyy in Ukraine. The supply of arms to Ukraine has been increasing and could increase further after these meetings (tanks are on their way but Ukraine is asking for jets too). This has tipped the balance of the war in Ukraine’s favour and Putin must be feeling threatened. Putin sounded confrontational in his speech yesterday. As for Putin’s next move it appears he will need to escalate in some way to tip the balance of the war back in his favour. He appears to have two options. Testing or using a tactical nuclear weapon, Russia’s exit from the START treaty is the first step on this path and feels like a threat. Or Russia can bring Belarus into the war so that they can attack Ukraine on multiple fronts. Lukashenko has already warned that Belarus would join Russia in the war against Ukraine if they are attacked. Lukashenko warns Belarus will join Russia in war if attacked – BBC News. The probability of some sort of escalation sadly appears to be increasing. This comes at a time when the market has become very sanguine about the war and has been seeking yield in Eastern Europe in the likes of HUF and PLN. I suspect positioning in HUF and PLN is high right now and the exit door will be very small if the war escalates. Meanwhile EURPLN options are trading on a low vol base with the 1m at 7.2%. This is not necessarily “cheap” given that realised vol in EURPLN has been closer to 5% but that would quickly change in an escalation scenario so that premium to hedge that risk looks low to me given the recent rhetoric out of Putin and Lukashenko. I have bought a 1m 4.8000 EURPLN call.
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