To The Moon

Macro Edge #36

Originally posted on: thepensivenugget.com

Note: We will be taking a short break. Regular posting of Macro Edge will resume in May. Thank you for reading!

The Dollar is moving broadly higher, which indicates tighter USD funding conditions globally.

It is also the last thing the world needs at the moment.

Also in this week’s Macro Edge: charts of JPY weakness and US 10y yields trading above their30 year bearish channel !

If You Haven’t Been Watching The USD, Start Now

• Most European markets were closed on Monday, meaning another shortened trading week, but pay close attention to the USD
• The Dollar is strengthening broadly against other major currencies
• It has broken out decisively vs JPY, and is trading at key technical levels vs EUR, GBP, CNY

• Global USD funding conditions are critical to how far financial contagion spreads, and how deep the recession gets
• Demand for USDs remains stronger than it was at its low in the middle of last year, which implies that global USD funding conditions are getting tighter - not a good sign for the world economy, and NOT helped by war
• USDCNY is the canary in the coal mine, and can tell us when stress levels in USD funding markets increase

• Commodities prices remain high even as they start to stabilize
• WTI and wheat seem to be trading in wide ranges, albeit at levels too high for a world contending with high inflation and growing recession risks
• Base metals prices remain bullish, with Copper pushing the top end of its range, Aluminum still >$3000, and Iron ore continuing to rally

• Higher energy, raw materials, and food costs feed into higher inflation all around the world. This, combined with the US yield curve’s inversion in early April and stronger USD, is stagflationary at best, deflationary at worst

Trading Ideas - Performance

Trading Ideas - Commentary

• Purchased a straddle on gold, using GLD options, to take advantage of gold trading in a tight range in the first week of April
• 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
• Did not put on an outright long position due to the uncertainty over which way gold would breakout of its range

• Entered into short positions in EURUSD (again) & GBPUSD
• EUR, GBP are best candidates to short vs the USD now as they are looking more bearish than AUD and CAD
• Need to wait for short term trend in AUD to realign with its medium term trend before taking a position

• 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%

• Long oil position did well (expressed via XLE in ETF Edge), and was also closed out due to volatility

• Exited straddle on TLT in anticipation of long yields turning lower, for a net gain of 18.4%
• Now looking and waiting for long yields to make a top, before going short US long yields (long 10y/30y USTs)

Trading Ideas

• Long USD:
• Well established trend, in place for >6 months in most major currency pairs
• If global economic growth does take a turn for the worse in the near future, global USD funding markets will tighten, driving the USD even higher. War in Ukraine is NOT helping
• US yield curve’s inversion in early April (even as the Fed turns hawkish) has given us a clear warning sign
• USDCNY has started to turn higher, hinting at worsening conditions
• Serves as a broad hedge against other “risk” assets in your portfolio, like stocks. BUT:
• Don’t think of the USD trade as “only” a hedge
• It is entirely possible, and normal, for the USD to strengthen as equities rise. The 2nd half of 2021 provides a good example of this, where US equities rallied even as the Dollar broadly strengthened
• 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

• Long Gold:
• Gold has quite decisively broken out of resistance levels and looks strong technically
• The geopolitical backdrop is also supportive of higher gold prices
• Be wary of trading gold based on current high levels of inflation as it didn’t rally over the past few months on record breaking CPI data releases & headlines

USD bulls return… EUR

• EUR has broken below the key 1.081 level, and is now testing support ~1.076, close to its COVID 2020 lows at 1.064
• Beware of increased volatility and a gap open next Monday (25 Apr), as the French presidential election runoff is held on the 24th

USD bulls return… GBP

• GBP has fallen back to hover around support at 1.30
• Sideways trading between 1.3–1.317 is possible in the short term
• A move lower is looking increasingly likely given its bearish trend and broad USD strength

USD bulls return… AUD

• AUD has fallen into the 0.73 region and is currently testing support from its uptrend
• A decisive break below will signal that the short term trend has flipped back to being bearish (look for a break of 0.7315 for further confirmation)

USD bulls return… CAD

• CAD has rallied back to test resistance in the 1.262–1.266 region, and is looking to move back into its bullish channel
• Support at 1.245, and resistance at 1.266, look to be key levels in the short term

USD bulls return… JPY

• JPY weakness is in the headlines as it has broken above both resistance at ~125 and its 2015 highs ~126
• A move to test 130 is looking likely

Except for CNY which is still consolidating…

• CNY is still consolidating outside of its bearish channel, trading close to resistance at 6.385
• Support lies ~6.32, with further resistance at 6.409
• CNY’s future direction will be key in determining the direction of other risk assets

US long yields make new COVID era highs… US 10y

• US 10y yields have broken above resistance at 2.77% and made new highs, trading at almost 2.9%
• Major resistance now lies at 2018’s double top, ~3.25%, with major support far away ~2.06%

US long yields make new COVID era highs… US 10y

• For context, US 10y yields have broken above their 30 year bearish channel, which makes resistance at 2018’s high ~3.25% all the more important in determining their future direction

US long yields make new COVID era highs… US 30y

• US 30y yields also continue to make new COVID era highs, and are now approaching major resistance ~3%
• Critical support is far away at ~2.05%

As the US yield curve steepens but remains flat…

• The US yield curve has continued to steepen last week with 2s-10s now at ~40 bps, and 5s-10s at ~8 bps
• It still remains very flat, and inversions, no matter how brief, are clear signs of stress in the system

US breakevens move back to their highs…

• Breakevens have moved back to their highs and continue to be quite volatile, probably mirroring oil prices
• Stagflation remains a distinct possibility, if not outright deflation

European yield curves keep steepening vs the US…

• The dissonance between US and European yield curves continues,with major European curves steepening to new highs in 2022
• A reversal of this could signal another global downturn, especially if CNY weakens even more

Oil stays above $100, but seems to be range bound…

• Oil looks to be trading in a wide range, between $92-$116
• March 7th looks increasingly like a top, but supply remains tight vs demand; a sharp drop in demand is needed for prices to really fall

Copper remains firm near the upper end of its range…

• Copper is still trading close to the top of its range ~$4.79
• Given the geopolitical situation and flattening yield curves, Dr Copper probably isn’t rallying because of global growth

Iron Ore consolidates, but still looks bullish…

• Iron ore remains above its bullish channel, but spent the past week trading sideways
• It has yet to rally to test resistance ~1033 (last July’s high)

Aluminium bounces around major support…

• Aluminium remains close to major support ~$3200, although prices remain very high, >$3000
• A break below $3200 could see a sell off to $2570

Gold hits $2000 again, can it go further?…

• Gold briefly broke above resistance at $1980 yesterday, rallying as high as $2000 before pulling back
• Another sustained move higher could see a test of March’s $2080 high

Wheat is still trading in a wide range

• Wheat, like oil, seems to be trading in a wide range, between $985-$1164
• High wheat & fertilizer prices, due to war related supply disruption, continue to threaten prolonged global inflation & possible social unrest

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