To The Moon

Views are my own. Not investment advice. Just my thoughts on macro developments.

I found myself getting very frustrated last week with the lack of follow through in USD despite the significant move higher in US rates. Although now the penny finally seems to have dropped that inflation isn’t going to revert quickly to 2% and the Fed will need to cause further pain if they want to bring inflation persistently down. So you can tear up your soft landing scenarios. Risk assets are being repriced lower as the risk free rate moves up. USD is finally joining the move, helped by the move lower in equities and some Value Date Month End USD demand on Friday. I feel that this USD move is only just getting started. The US data has been uniformly strong and there are still soft landing trades that will need to be unwound. I’m yet to see any month end model signals for tomorrow’s month end but I generally find that US equities lower on the month means USD demand. As for events this week any Fed speakers will be important, we have Jefferson today. Then for releases I feel that US ISM Prices Paid components will be the thing to watch, manufacturing ISM on Wednesday and Services on Friday. In my view the Fed allowed financial conditions to ease too much from November-January and now inflation pressures have reignited and they will be forced to put further pressure on the market to kill those animal spirits.

The breaks lower in AUDUSD and NZDUSD last week were significant. NZDUSD broke a combination of the YTD low, 100dayMA and 200dayMA through 0.6190. 0.6200 now acts as resistance, I am short and will be adding on any rally towards that zone expecting the move to continue down to 0.6000. AUDUSD’s close below 0.6800 was equally significant and I will be selling any rallies to 0.6750 on the day looking for this move to continue down to 0.6600.

New BOJ Governor Ueda has proved himself to be very much in line with Kuroda’s thinking so all the positioning for a hawkish shift from the BOJ now looks very stale and I expect USDJPY to go back to tracking US yields. USDJPY still looks low compared to where the rate differential is so I expect spot has some catching up to do. USDJPY has now broken through the top of the ichimoku cloud which opens up the topside. I do not feel that this is a move that the market is on, if anything the market was short USDJPY expecting a hawkish shift from Ueda so I feel that this USDJPY move higher can gather momentum higher from here.

I am still long XAUUSD medium term as I expect a stagflation scenario this year. It is a difficult one to time with real yields weighing on Gold in the short term. 1800.00 next support.

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 last week. 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%. 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.