January 2020 Macro Markets Blog Post
Hi all,
Welcome to and thank you for checking out the next Macro Squawk blog post. Coming into the beginning of 2020, we see a lot of positive supports for risk assets everywhere - chief among these being the 'resolution' on trade ahead of the election, a reduction of Brexit uncertainty, and a moderated outlook from the Fed about interest rate expectations over the course of the year, along with Europe leaning closer towards liberal fiscal policy at the behest of Christine Lagarde. I think Druck said it best in his December interview with Bloomberg that "it's all systems go,"... at least for now.
Given this macro backdrop, lets dive right into some interesting trade ideas that I see around.
Long AUDUSD
First and foremost we're finally starting to see the long Aussie trade work out. The reason that this is a trade worth considering is because it has both macro and micro factors working for it. We know that Australia is a big commodity currency and that a lot of its output goes to China - so let's look at China. What we're seeing now is that absent any trade war tensions, we are starting to see a meaningful recovery in Chinese credit growth via its credit impulse (chart below). This has also led to what is starting to look like an early turnaround in Chinese inflation as over the second half of 2019, China has had to inject stimulus into its financial system via reductions in RRR which, along with the resolution of trade could indicate that commodity demand from China is back - a clear benefit to Australia. The country reasoning is that over the second half of 2019, the RBA had been indicating that the slump that they had been in in the first half of 2019 had found a 'soft landing' and that economic outcomes were soon to shift. This is exactly what we got on Friday (1/10/20) where retail sales had a huge overshoot, along with building permits earlier in the week where the recovery in housing prices was another factor the RBA had been discussing in the second half of 2019. The final and most important reasoning for why this is an interesting trade is because technically, it had made three wave highs in December up above the downtrend line that it had held since November 2018 - it then had a wave of selling where it kept above the broken trend line and is now reversing to the upside on range (charts below). All of these factors lead me to believe that this could be a longer term trend not only over the next few weeks but over months and maybe extending into the year time frame.
Here we also see the chart of AUD retail sales. We see that over the course of 2019 it had flattened out but has now made a meaningful reversal, all that the RBA has been indicating since the second half of 2019.
Finally we see the chart of AUDUSD. This seems like a good setup to get in on in that it has had three wave highs, a reversal to the trend line it broke without breaking down, and is going up on range, indicating a solid possibility of a longer term uptrend that we might be able to catch right from the beginning. At the time of writing (1/12/19), it seems that a stop can be set at .6840.
Selling Rate Vol
As mentioned previously, it currently seems that the theme for 2020 will be the Fed being on hold. This is due to several factors, chief among them being the fact that this is an election year, and quite a pivotal election year it is. It would seem a political difficulty for Trump to come into his election bid with the Fed raising rates. Throughout 2019, we've also seen indication that Trump has at least some kind of control over the FOMC's decisions with the three rate cuts we saw as "insurance cuts" due to the trade tensions we saw in the summer of 2019. Now we see that with no more need for insurance, the Fed has instead of opting to raise rates, is now looking to keep rates on hold. This would seem to be a very politically driven decision and as a result, it would create an opportunity to sell rate vol. It would seem that there could be some kind of systemic vol selling program created to sell call spreads at weekly or bi-weekly intervals. I would err on the side of caution on selling the entire iron condor in that any shocks to the financial system would seem to be to the downside. At present, it would seem the best way to implement this program would be to sell call spreads on UST 2s as they are creating a clear consolidation pattern around 1.6 which, fundamentally, seems would only be able to break to the downside.
Long EM with opportunistic EM shorts
It would seem that throughout the positive factors for the global economy, EMs would be the biggest winners. This is in stark contrast to the previous blog post where I was recommending short certain EMs. Largely due to the trade resolution, we have seen capital flowing out of safer US assets and into currently better risk-adjusted return emerging markets trades. We see this in the fact that DXY has made a meaningful reversal to the downside at the same time that capital is flowing into EM assets. It would seem here that the strongest trades are to get long EM equities through March MSCI Emerging Markets Futures, as well as certain FX trades such as short USDMXN.
Here we see the case that there has been in a meaningful reversal in DXY coming into the end of the year. This can partly be attributed to the policy stance of the FOMC, as well as reduction of uncertainty at the end of 2019, as well as global growth expectations starting to dull down.
As a result of these flows, it might be that we are seeing flows into EM equities. This could lead to a potential long on on march MSCI Emerging Markets Futures for which, at the time of writing (1/12/19), we might be able to set a stop 1115.
What we are seeing here is that immediately after the resolution of the trade deal in December, we saw a break from a major triangle pattern to the downside - a pattern that was created at the very start of the trade war. In the last blog post I wrote that continued tensions with trade would lead to continued capital flight but those issues no longer seem to be the case. If you weren't already in this trade, the second chart shows a potential new entry. If we can close below 18.8, then it would seem that this is a good short opportunity and that we can set our stop somewhere around 18.95 (depending on how price action plays out).
EM Shorts
Continuing with the same theme from the last blog post, it would seem that now we might have an opportunity to get long USDBRL. The thesis is the same in that the country is still fundamentally weak and is requiring the central bank to do FX purchases to maintain strength which doesn't sound like a sustainable policy for Brazil. What has tipped me off to another opportunity to get short is the fact that factory orders data this past week had a print which subsequently led to a reversal at the 4 handle, which has been an important round number resistance for USDBRL. It could certainly be the case that what we are currently seeing is a pullback before we make new lows and close below the 4 handle as a result of the flows into EMs. For this reason, this is a trade that one would want to start small in, and then add into it as it continues to yield profits. The initial stop should be set at 4.054, and the initial area we might think about adding more size to this trade would be once we have a close above 4.14, the 50% retracement level which would indicate that this isn't a pullback.
The second EM short I am currently looking at is getting long USDTHB. The interesting thing about this is that similar to Brazil, the Bank of Thailand is trying to reign in the strength of the Baht as it is starting to affect its trade balance via reduced exports and increased imports. The reason that this one seems sustainable unlike Brazil's however, is because they are using different policy measures. In this case, Thailand has opted to cut rates, as well as easing capital controls whereas Brazil is trying to go about it with asset purchases. This seems to be a more sustainable way to go about weakening the currency. It would also seem that the reason for the Baht's strength was not some economic flow of capital into the country as the Stock Exchange of Thailand (SET), as well as Thai Real Estate (MSCI Thailand Real Estate Index), have under-performed their South-East Asian peers. This indicates to me that it could possibly be a carry trade which the cutting of interest rates could credibly unwind and lead to a huge possible run up.
The other thing is that the reason that Thai assets have underperformed their peers is because of their current account and trade surpluses that run at greater than 5% of GDP, which has led to an imbalance between imports and exports. The other important to keep in mind is that Thailand's largest trading partner is China, which provides demand for products and a bustling tourism industry which due to the Baht's strength has led to a tapering off of such inflows and has led to an imbalance. This is the reason the BoT has implemented rate cuts as well as loosening capital constraints. We are already seeing Baht weakness play out in THBCNH and as the US is another one of its largest trading partners, it stands to reason that this might be an opportunity to ride a new trend early on.
As far as trading goes, this is also an interesting opportunity as the Bank of Thailand has committed to keeping the USDTHB higher than 30, offering an opportunity for a tight stop at 29.4. The other way to trade this might potentialy be that we wait for another range up day, or successive days that lead to a close above the most recent high of 30.368, indicating that USDTHB is coming into an uptrend.
Here we see USDTHB, having been in a downtrend since 2015 and seeming to have bottomed out near the end of 2019. Technically, this would indicate some kind of rounding bottom which would lead to a new uptrend. That along with the fundamental reasoning above, would indicate that this might be a potential long with the opportunity to have a tight stop.
Short Inflation - Gold, UST 10s
As mentioned previously, due to the armistice on trade, we have seen what might be called the global reflation theme playing out. Even though it would seem that risk-assets everywhere will continue to rally into the foreseeable future, which I do not disagree with, it doesn't seem to be the case that inflation will rise with it. We are currently living in a world where the Phillips Curve is flattening out leading to anemic inflation with unemployment at 3.5%. On top of that, we are also seeing economic growth slowing, though discernibly less than at the end of 2018 - examples are a lukewarm holiday spending season, GDP growth forecasts and expectations being revised down, along with the most recent payrolls number missing. On a longer term scale, these might be taken to be waning effects of the tax cut which pushed back a downturn by some time. Though obviously, these things can change as new data comes out after the trade resolution, but currently it doesn't seem likely that there could be some kind of overshoot of inflation on Core PCE like how there was in early 2018 after the tax cuts. As a result, we might want to look at getting short inflation.
Currently, the best setup around is to get short gold. This is because after the run up from the Iran tensions (which this time seemed to be an almost non-event except in commodities), we have been lifted away from economic fundamentals to which we will soon revert. The opportunity here would be to get short gold after a meaningful close below 1550, a level which is an important round number resistance. The second best opportunity seems to be getting long UST 10s. In the last blog post, I had wrote about getting short 10s after the Hong Kong Bill and riding the uptrend. Now, however, it looks as if that trend is in the early stages of a breakdown, now making lower highs as well as being unable to pass through the important 2% level - indicating that inflation will undershoot the Fed's target rate which is concurrent with the above reasoning. To trade this, we might wait until we see a break and close below the trend line that it has been holding since August 2019 for confirmation of validity.
Here we see the chart of Feb Gold. As you see, it had made a big run-up in December as inflation expectations picked up due to the positive factors that had developed in December, climaxing with the Iran tensions. Now, however, seems like a good time to fade inflation expectations and getting a meaningful close below 1550 sounds like the time to get into the trade.
We also see a similar thing happening on UST 10s, in that yields picked up after the December news, but this time were unable to make new highs or get above the 2% level. This indicates that we might be seeing a breakdown of the uptrend due to economic fundamentals, rather than policy. We might want to get into this trade after there has been a close below the trend line.
Thank you for reading. I am planning on writing blogs twice a month from here on out. Would love your feedback and suggestions on how to improve as I am a senior at NYU Stern studying Finance and Philosophy and interested in the Financial Services Industry. I can be contacted at snd314@stern.nyu.edu
Welcome to and thank you for checking out the next Macro Squawk blog post. Coming into the beginning of 2020, we see a lot of positive supports for risk assets everywhere - chief among these being the 'resolution' on trade ahead of the election, a reduction of Brexit uncertainty, and a moderated outlook from the Fed about interest rate expectations over the course of the year, along with Europe leaning closer towards liberal fiscal policy at the behest of Christine Lagarde. I think Druck said it best in his December interview with Bloomberg that "it's all systems go,"... at least for now.
Given this macro backdrop, lets dive right into some interesting trade ideas that I see around.
Long AUDUSD
First and foremost we're finally starting to see the long Aussie trade work out. The reason that this is a trade worth considering is because it has both macro and micro factors working for it. We know that Australia is a big commodity currency and that a lot of its output goes to China - so let's look at China. What we're seeing now is that absent any trade war tensions, we are starting to see a meaningful recovery in Chinese credit growth via its credit impulse (chart below). This has also led to what is starting to look like an early turnaround in Chinese inflation as over the second half of 2019, China has had to inject stimulus into its financial system via reductions in RRR which, along with the resolution of trade could indicate that commodity demand from China is back - a clear benefit to Australia. The country reasoning is that over the second half of 2019, the RBA had been indicating that the slump that they had been in in the first half of 2019 had found a 'soft landing' and that economic outcomes were soon to shift. This is exactly what we got on Friday (1/10/20) where retail sales had a huge overshoot, along with building permits earlier in the week where the recovery in housing prices was another factor the RBA had been discussing in the second half of 2019. The final and most important reasoning for why this is an interesting trade is because technically, it had made three wave highs in December up above the downtrend line that it had held since November 2018 - it then had a wave of selling where it kept above the broken trend line and is now reversing to the upside on range (charts below). All of these factors lead me to believe that this could be a longer term trend not only over the next few weeks but over months and maybe extending into the year time frame.
Here we see the chart of Chinese credit impulse making a distinguishable early comeback. Along
with the positive news on trade and the Chinese inflation story, it would seem that using it to understand risk-on sentiment at this time would make sense.
Here we also see the chart of AUD retail sales. We see that over the course of 2019 it had flattened out but has now made a meaningful reversal, all that the RBA has been indicating since the second half of 2019.
Finally we see the chart of AUDUSD. This seems like a good setup to get in on in that it has had three wave highs, a reversal to the trend line it broke without breaking down, and is going up on range, indicating a solid possibility of a longer term uptrend that we might be able to catch right from the beginning. At the time of writing (1/12/19), it seems that a stop can be set at .6840.
Selling Rate Vol
As mentioned previously, it currently seems that the theme for 2020 will be the Fed being on hold. This is due to several factors, chief among them being the fact that this is an election year, and quite a pivotal election year it is. It would seem a political difficulty for Trump to come into his election bid with the Fed raising rates. Throughout 2019, we've also seen indication that Trump has at least some kind of control over the FOMC's decisions with the three rate cuts we saw as "insurance cuts" due to the trade tensions we saw in the summer of 2019. Now we see that with no more need for insurance, the Fed has instead of opting to raise rates, is now looking to keep rates on hold. This would seem to be a very politically driven decision and as a result, it would create an opportunity to sell rate vol. It would seem that there could be some kind of systemic vol selling program created to sell call spreads at weekly or bi-weekly intervals. I would err on the side of caution on selling the entire iron condor in that any shocks to the financial system would seem to be to the downside. At present, it would seem the best way to implement this program would be to sell call spreads on UST 2s as they are creating a clear consolidation pattern around 1.6 which, fundamentally, seems would only be able to break to the downside.
Long EM with opportunistic EM shorts
It would seem that throughout the positive factors for the global economy, EMs would be the biggest winners. This is in stark contrast to the previous blog post where I was recommending short certain EMs. Largely due to the trade resolution, we have seen capital flowing out of safer US assets and into currently better risk-adjusted return emerging markets trades. We see this in the fact that DXY has made a meaningful reversal to the downside at the same time that capital is flowing into EM assets. It would seem here that the strongest trades are to get long EM equities through March MSCI Emerging Markets Futures, as well as certain FX trades such as short USDMXN.
Here we see the case that there has been in a meaningful reversal in DXY coming into the end of the year. This can partly be attributed to the policy stance of the FOMC, as well as reduction of uncertainty at the end of 2019, as well as global growth expectations starting to dull down.
EM Shorts
Continuing with the same theme from the last blog post, it would seem that now we might have an opportunity to get long USDBRL. The thesis is the same in that the country is still fundamentally weak and is requiring the central bank to do FX purchases to maintain strength which doesn't sound like a sustainable policy for Brazil. What has tipped me off to another opportunity to get short is the fact that factory orders data this past week had a print which subsequently led to a reversal at the 4 handle, which has been an important round number resistance for USDBRL. It could certainly be the case that what we are currently seeing is a pullback before we make new lows and close below the 4 handle as a result of the flows into EMs. For this reason, this is a trade that one would want to start small in, and then add into it as it continues to yield profits. The initial stop should be set at 4.054, and the initial area we might think about adding more size to this trade would be once we have a close above 4.14, the 50% retracement level which would indicate that this isn't a pullback.
The other thing is that the reason that Thai assets have underperformed their peers is because of their current account and trade surpluses that run at greater than 5% of GDP, which has led to an imbalance between imports and exports. The other important to keep in mind is that Thailand's largest trading partner is China, which provides demand for products and a bustling tourism industry which due to the Baht's strength has led to a tapering off of such inflows and has led to an imbalance. This is the reason the BoT has implemented rate cuts as well as loosening capital constraints. We are already seeing Baht weakness play out in THBCNH and as the US is another one of its largest trading partners, it stands to reason that this might be an opportunity to ride a new trend early on.
As far as trading goes, this is also an interesting opportunity as the Bank of Thailand has committed to keeping the USDTHB higher than 30, offering an opportunity for a tight stop at 29.4. The other way to trade this might potentialy be that we wait for another range up day, or successive days that lead to a close above the most recent high of 30.368, indicating that USDTHB is coming into an uptrend.
Here we see USDTHB, having been in a downtrend since 2015 and seeming to have bottomed out near the end of 2019. Technically, this would indicate some kind of rounding bottom which would lead to a new uptrend. That along with the fundamental reasoning above, would indicate that this might be a potential long with the opportunity to have a tight stop.
Short Inflation - Gold, UST 10s
As mentioned previously, due to the armistice on trade, we have seen what might be called the global reflation theme playing out. Even though it would seem that risk-assets everywhere will continue to rally into the foreseeable future, which I do not disagree with, it doesn't seem to be the case that inflation will rise with it. We are currently living in a world where the Phillips Curve is flattening out leading to anemic inflation with unemployment at 3.5%. On top of that, we are also seeing economic growth slowing, though discernibly less than at the end of 2018 - examples are a lukewarm holiday spending season, GDP growth forecasts and expectations being revised down, along with the most recent payrolls number missing. On a longer term scale, these might be taken to be waning effects of the tax cut which pushed back a downturn by some time. Though obviously, these things can change as new data comes out after the trade resolution, but currently it doesn't seem likely that there could be some kind of overshoot of inflation on Core PCE like how there was in early 2018 after the tax cuts. As a result, we might want to look at getting short inflation.
Currently, the best setup around is to get short gold. This is because after the run up from the Iran tensions (which this time seemed to be an almost non-event except in commodities), we have been lifted away from economic fundamentals to which we will soon revert. The opportunity here would be to get short gold after a meaningful close below 1550, a level which is an important round number resistance. The second best opportunity seems to be getting long UST 10s. In the last blog post, I had wrote about getting short 10s after the Hong Kong Bill and riding the uptrend. Now, however, it looks as if that trend is in the early stages of a breakdown, now making lower highs as well as being unable to pass through the important 2% level - indicating that inflation will undershoot the Fed's target rate which is concurrent with the above reasoning. To trade this, we might wait until we see a break and close below the trend line that it has been holding since August 2019 for confirmation of validity.
Here we see the chart of Feb Gold. As you see, it had made a big run-up in December as inflation expectations picked up due to the positive factors that had developed in December, climaxing with the Iran tensions. Now, however, seems like a good time to fade inflation expectations and getting a meaningful close below 1550 sounds like the time to get into the trade.
We also see a similar thing happening on UST 10s, in that yields picked up after the December news, but this time were unable to make new highs or get above the 2% level. This indicates that we might be seeing a breakdown of the uptrend due to economic fundamentals, rather than policy. We might want to get into this trade after there has been a close below the trend line.
Thank you for reading. I am planning on writing blogs twice a month from here on out. Would love your feedback and suggestions on how to improve as I am a senior at NYU Stern studying Finance and Philosophy and interested in the Financial Services Industry. I can be contacted at snd314@stern.nyu.edu
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