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fx:macro Summary Changes 2023_01_14

Created about a year agoDiff never expires

23 removals

113 lines

36 additions

123 lines

"07.01.23

"14.01.23

***** MACRO *****

>>BULL<<

▶︎ The China opening is happening, and while its effects may take time to play out they eventually will

▶︎ Copper is performing

▶︎ Credit spreads seem more or less contained, the Corporate Bond Market Distress Index is lower

▶︎ No signs of stress from equity volatility and options

▶︎ Market breadth is looking pretty decent

>>BEAR<<

▶︎ Short-term: correlation between ES and VIX is high which is a warning sign for a top in equities

▶︎ Global and Asian PMIs are weakening further (notable exception: India)

▶︎ Energy futures are just very weak

▶︎ Energy futures are still lagging the China trade

▶︎ US treasuries have started to perform: it still looks like a trade on a Fed pivot with treasuries rising when everything else is but it could quickly become a play on softer growth

▶︎ Six out of eight G8 2s10s have so far inverted

▶︎ Fear & Greed is at Greed (but far from extremes)

>>SUMMARY<<

Having taken a bit of a break from the markets is good because I can take a fresh look.

The market feels slightly more bullish than last week overall, breadth is improving, volatility has come down with VIX below 20, metals performing, energy catching up, and so on. I'm still not going to commit to a bias, though, because I find the whole situation very unclear.

It feels like the overall macro situation is even more unclear now, and things aren't fitting together well enough for me to formulate a bias. There are good arguments for a soft landing (of the economy and the stock market) but also for the complete opposite. Let's not forget the chaos of a few months ago: I find it hard to believe that we've had the UK financial system almost go belly-up and we're out of the woods today. My plan for now is: watching carefully, reducing risk as much as possible and continuing to buy cheap tail hedges in case things go south.

***** USD *****

>>BULL<<

▶︎ The economy is resilient, it's still growing and the labour market is showing no sign of softening

▶︎ The global economy is still slowing and the US is still outperforming, which should both be good for the dollar

>>BEAR<<

▶︎ 25 bps for February are priced in: it's still a hike but it looks dovish, and Fed speakers haven't been helping here

▶︎ Inflation and inflation breakevens are trending lower while real yields are going nowhere

▶︎ CESI for the G10 has been improving for months now... this doesn't square with the Dollar Smile at all

▶︎ CSII continues to go down

▶︎ USD hasn't rallied on a bear flattener and it could now be bull steepening

▶︎ Market-implied meeting probabilities shifted more dovish

▶︎ The China reopening should be bearish USD

▶︎ PMIs have been disappointing

▶︎ Treasuries have bullish COT positioning which could weigh on yields

▶︎ Treasuries have bullish COT positioning which could weigh on yields (pared back a bit this week, though)

▶︎ The market is still very long USD (according to PAIN) or at least not extremely short (according to COT)

>>SUMMARY<<

The bearish arguments seem to have stacked up quite a bit over the last weeks. I still think there's a case for a medium-term long with the global economy slowing and the US outperforming on a relative basis. For short-term trades I'm still looking to short it because of the Fed pause, inflation coming down, positive China headlines etc.

Last week I wrote that having taken a break feels good because it allows for a fresh look at things, and I think that's what I needed to do with the dollar: my medium-term long bias was mostly based on the dollar smile with weaker global growth and the US outperforming. That's just not what's been happening over the last few months (see the G10 CESI and China reopening). I'm removing the medium-term bias.

***** EUR *****

>>BULL<<

▶︎ The ECB looks comparatively hawkish, and they will likely continue hiking while the Fed (and others) pause

▶︎ The front-end of the yield curve is holding up well

▶︎ Bear flattening in 2s10s continues

▶︎ Fragmentation risks seem to be either contained or the market isn't caring about them for now

▶︎ The mild winter has completely soothed fears of an energy shortage

▶︎ CESI is going strong

▶︎ PMIs have been surprising to the upside and have been less bad than feared

▶︎ Stock markets are outperforming

▶︎ Seasonality is bullish

>>BEAR<<

▶︎ Positioning is at bearish extremes

▶︎ It's not profiting as much from the weak dollar as expected

▶︎ Not sure what it would take for the Ukraine war to spook the market again: Belarus attacking, another mobilization... not sure but it's still a relevant risk

>>SUMMARY<<

A lot more bullish arguments than bearish ones. The extreme in positioning has me a bit worried, and I wouldn't want to be long on a higher timeframe because of it but for short-term trades I'm looking to play it from the long side.

Same as last week: A lot more bullish arguments than bearish ones. The extreme in positioning has me a bit worried, and I wouldn't want to be long on a higher timeframe because of it but for short-term trades I'm looking to play it from the long side.

***** GBP *****

>>BULL<<

▶︎ A bit of hawkish BoE-speak this week

▶︎ Another batch of data this week that surprised to the upside

>>BEAR<<

▶︎ The inherent strength it has shown for the last few months seems to be gone

▶︎ The inherent strength it has shown for the last few months seems to be weaker

▶︎ The economic outlook is bleak, they expect to be in a recession for the entire year

▶︎ The entire country seems to be in disarray with everyone on strike and people being squeezed

▶︎ Dovish central bank with two dissenters at the last meeting

▶︎ CESI has rolled over and is heading lower

▶︎ Weaker on the PMI heatmap

▶︎ Even if its 2s and 10s look decent, they aren't driving it at the moment (negative correlation)

>>SUMMARY<<

I feel very biased because I don't have a single bullish argument for the sterling here. But it is what it is.

It feels like 2022 happens all over again: the fundamentals are bad but it's just looking through all of that and trades higher. The correlations with ES and VIX make it look like a risk-on/risk-off currency, so I have to take that into account.

***** AUD *****

>>BULL<<

▶︎ CPI upside surprise this week

▶︎ It has started to perform somewhat... not sure why now when it did so poorly over the last months: Chinese reopening finally catching on?

▶︎ OECD CLI has it outperforming (but data is from October)

▶︎ OECD CLI has it outperforming

>>BEAR<<

▶︎ Weaker PMIs for Australia and most of Asia

>>SUMMARY<<

Hard to say what to make of it... its strength feels fake in light of how it traded last year but then the China reopening would be a fitting narrative. It has the second-highest correlation to ES, so I'll treat it as a pure risk-on/risk-off proxy for now.

The stronger CPI seemed significant at first but the RBA has looked through a print like that before, so I'm not putting too much weight on it. AUD has been trading better than expected but I don't feel like that's enough to change the bias.

***** NZD *****

>>BULL<<

▶︎ The China reopening should be positive for NZD with tourism catching a bid

▶︎ The RBNZ is decidedly more hawkish than the neighbouring RBA

>>BEAR<<

▶︎ Positioning is bearish

▶︎ CESI has rolled over

>>SUMMARY<<

It has traded the China reopening much better than AUD, the RBNZ is still hawkish but going through the last weeks of econ data it feels fundamentally weaker than before. Still, I maintain a long bias... which doesn't mean I'll be looking at AUDNZD short automatically (even if that may sound illogical).

I'm changing the bias to neutral: it's underperforming AUD, the China trade seems to be over already for NZD, and the economic data has weakened. My model indicates a short bias for NZD, and it would make sense because AUD and NZD have been virtually uncorrelated for a while, but I'm not a machine so I'll treat them as equals for now.

***** CAD *****

>>BULL<<

▶︎ CESI is going higher

▶︎ Positioning is bullish

▶︎ 25-delta risk reversal seeing it stronger

>>BEAR<<

▶︎ The BOC has practically announced the end of their hiking cycle

▶︎ It's inherently weak

▶︎ Energy is underperforming and the correlation CAD vs. CL is still positive

>>SUMMARY<<

The short in CAD looks like a move a lot of people expected for 2023 but that has already occured and now positioning is already at a bullish extreme. The underlying fundamentals are still weak and the BOC is still dovish but it doesn't feel good to short it after how much it tanked in just a few weeks.

The economy is doing okay, the last two CPI prints mostly surprised to the upside, so I wonder whether my assessment of the BOC being dovish might turn out to be wrong, especially since CAD looks pretty oversold and vulnerable to a hawkish surprise. Still not enthusiastic about it since it hangs on the USD.

***** CHF *****

>>BULL<<

▶︎ PMI still green on the heatmap

▶︎ Sentiment is bearish (listed that on the wrong side last week)

>>BEAR<<

▶︎ Its performance is still mediocre-to-bad

▶︎ CESI is glued to its floor

▶︎ Inflation has disappointed, taking pressure off the SNB

▶︎ Last inflation print was deflationary and surprised to the downside, CSII is falling

▶︎ Positioning at bearish extremes

▶︎ Sentiment is bearish

>>SUMMARY<<

It's not a heartfelt short because of the high correlation to EUR (about 0.6 over 100 days) but then it hasn't been as strong as I had expected it to be for months last year. It has a relevant negative correlation to the ES of about -0.5, so I'll treat it as risk-on/off mostly.

Unchanged from last week: It's not a heartfelt short because of the high correlation to EUR (about 0.6 over 100 days) but then it hasn't been as strong as I had expected it to be for months last year. It has a relevant negative correlation to the ES of about -0.5, so I'll treat it as risk-on/off mostly.

***** JPY *****

>>BULL<<

▶︎ More hawkish news from the BOJ (about a review of the side-effects of their easy policy)

▶︎ The latest BOJ decision was an unexpected and hawkish surprise despite the verbal pushback

▶︎ Widening of the YCC band looks like a first step

▶︎ Widening of the YCC band looks like a first step, yield differentials are narrowing

▶︎ The nomination process for the succession of Kuroda will take off in a few weeks, the market seems to be taking it as hawkish

▶︎ Positioning still has a pretty long way to go until it ""normalizes""

▶︎ Inflation has been surprising to the upside (not showing up in the CSII, though)

▶︎ OECD CLI outperformer

>>BEAR<<

▶︎ Still the most dovish central bank out there

▶︎ Bullish sentiment

>>SUMMARY<<

It doesn't feel like the YCC change has been priced in completely: USDJPY is now only 5% lower than it was before the BOJ meeting, the upcoming changes in BOJ leadership and the talks/rumours around it are probably more hawkish than dovish. Add the way US yields trade and the bullish positioning in USTs, and it's a long for the yen."

I don't know enough about the JGB market to make an educated guess whether the BOJ will make a back-to-back change to their policy next week. But it's what the market is trading at the moment, and it feels as if everyone is a bit too excited. Also, the move is getting extended even though positioning-wise there's still quite a way to go until things normalize. It's still a long because that's the way of least resistance until the BOJ rate statement in my view."

Saved diffs

Original text

Open file

"07.01.23
***** MACRO *****
     >>BULL<<
▶︎ The China opening is happening, and while its effects may take time to play out they eventually will
▶︎ Copper is performing
▶︎ Credit spreads seem more or less contained, the Corporate Bond Market Distress Index is lower
▶︎ No signs of stress from equity volatility and options
     >>BEAR<<
▶︎ Global and Asian PMIs are weakening further (notable exception: India)
▶︎ Energy futures are just very weak
▶︎ US treasuries have started to perform: it still looks like a trade on a Fed pivot with treasuries rising when everything else is but it could quickly become a play on softer growth
▶︎ Six out of eight G8 2s10s have so far inverted
     >>SUMMARY<<
Having taken a bit of a break from the markets is good because I can take a fresh look. 
It feels like the overall macro situation is even more unclear now, and things aren't fitting together well enough for me to formulate a bias. There are good arguments for a soft landing (of the economy and the stock market) but also for the complete opposite. Let's not forget the chaos of a few months ago: I find it hard to believe that we've had the UK financial system almost go belly-up and we're out of the woods today. My plan for now is: watching carefully, reducing risk as much as possible and continuing to buy cheap tail hedges in case things go south.

***** USD *****
     >>BULL<<
▶︎ The economy is resilient, it's still growing and the labour market is showing no sign of softening
▶︎ The global economy is still slowing and the US is still outperforming, which should both be good for the dollar
     >>BEAR<<
▶︎ Inflation and inflation breakevens are trending lower while real yields are going nowhere
▶︎ CSII continues to go down
▶︎ USD hasn't rallied on a bear flattener and it could now be bull steepening
▶︎ Market-implied meeting probabilities shifted more dovish
▶︎ The China reopening should be bearish USD
▶︎ PMIs have been disappointing
▶︎ Treasuries have bullish COT positioning which could weigh on yields
     >>SUMMARY<<
The bearish arguments seem to have stacked up quite a bit over the last weeks. I still think there's a case for a medium-term long with the global economy slowing and the US outperforming on a relative basis. For short-term trades I'm still looking to short it because of the Fed pause, inflation coming down, positive China headlines etc.

***** EUR *****
     >>BULL<<
▶︎ The ECB looks comparatively hawkish, and they will likely continue hiking while the Fed (and others) pause
▶︎ The front-end of the yield curve is holding up well
▶︎ Fragmentation risks seem to be either contained or the market isn't caring about them for now
▶︎ The mild winter has completely soothed fears of an energy shortage
▶︎ CESI is going strong
▶︎ PMIs have been surprising to the upside and have been less bad than feared
▶︎ Stock markets are outperforming
▶︎ Seasonality is bullish
     >>BEAR<<
▶︎ Positioning is at bearish extremes
▶︎ Not sure what it would take for the Ukraine war to spook the market again: Belarus attacking, another mobilization... not sure but it's still a relevant risk
     >>SUMMARY<<
A lot more bullish arguments than bearish ones. The extreme in positioning has me a bit worried, and I wouldn't want to be long on a higher timeframe because of it but for short-term trades I'm looking to play it from the long side.

***** GBP *****
     >>BULL<<

     >>BEAR<<
▶︎ The inherent strength it has shown for the last few months seems to be gone
▶︎ The economic outlook is bleak, they expect to be in a recession for the entire year
▶︎ The entire country seems to be in disarray with everyone on strike and people being squeezed 
▶︎ Dovish central bank with two dissenters at the last meeting
▶︎ CESI has rolled over and is heading lower
▶︎ Weaker on the PMI heatmap
▶︎ Even if its 2s and 10s look decent, they aren't driving it at the moment (negative correlation)
     >>SUMMARY<<
I feel very biased because I don't have a single bullish argument for the sterling here. But it is what it is.

***** AUD *****
     >>BULL<<
▶︎ It has started to perform somewhat... not sure why now when it did so poorly over the last months: Chinese reopening finally catching on?
▶︎ OECD CLI has it outperforming (but data is from October)
     >>BEAR<<
▶︎ Weaker PMIs for Australia and most of Asia
     >>SUMMARY<<
Hard to say what to make of it... its strength feels fake in light of how it traded last year but then the China reopening would be a fitting narrative. It has the second-highest correlation to ES, so I'll treat it as a pure risk-on/risk-off proxy for now.

***** NZD *****
     >>BULL<<
▶︎ The China reopening should be positive for NZD with tourism catching a bid
▶︎ The RBNZ is decidedly more hawkish than the neighbouring RBA
     >>BEAR<<
▶︎ Positioning is bearish
     >>SUMMARY<<
It has traded the China reopening much better than AUD, the RBNZ is still hawkish but going through the last weeks of econ data it feels fundamentally weaker than before. Still, I maintain a long bias... which doesn't mean I'll be looking at AUDNZD short automatically (even if that may sound illogical).

***** CAD *****
     >>BULL<<
▶︎ CESI is going higher
▶︎ Positioning is bullish
▶︎ 25-delta risk reversal seeing it stronger
     >>BEAR<<
▶︎ The BOC has practically announced the end of their hiking cycle
▶︎ It's inherently weak
▶︎ Energy is underperforming and the correlation CAD vs. CL is still positive
     >>SUMMARY<<
The short in CAD looks like a move a lot of people expected for 2023 but that has already occured and now positioning is already at a bullish extreme. The underlying fundamentals are still weak and the BOC is still dovish but it doesn't feel good to short it after how much it tanked in just a few weeks.

***** CHF *****
     >>BULL<<
▶︎ PMI still green on the heatmap
     >>BEAR<<
▶︎ Its performance is still mediocre-to-bad
▶︎ CESI is glued to its floor
▶︎ Inflation has disappointed, taking pressure off the SNB
▶︎ Positioning at bearish extremes
▶︎ Sentiment is bearish
     >>SUMMARY<<
It's not a heartfelt short because of the high correlation to EUR (about 0.6 over 100 days) but then it hasn't been as strong as I had expected it to be for months last year. It has a relevant negative correlation to the ES of about -0.5, so I'll treat it as risk-on/off mostly.

***** JPY *****
     >>BULL<<
▶︎ The latest BOJ decision was an unexpected and hawkish surprise despite the verbal pushback
▶︎ Widening of the YCC band looks like a first step
▶︎ The nomination process for the succession of Kuroda will take off in a few weeks, the market seems to be taking it as hawkish
▶︎ Inflation has been surprising to the upside (not showing up in the CSII, though)
▶︎ OECD CLI outperformer
     >>BEAR<<
▶︎ Still the most dovish central bank out there
     >>SUMMARY<<
It doesn't feel like the YCC change has been priced in completely: USDJPY is now only 5% lower than it was before the BOJ meeting, the upcoming changes in BOJ leadership and the talks/rumours around it are probably more hawkish than dovish. Add the way US yields trade and the bullish positioning in USTs, and it's a long for the yen."

Changed text

Open file

"14.01.23
***** MACRO *****
     >>BULL<<
▶︎ The China opening is happening, and while its effects may take time to play out they eventually will
▶︎ Copper is performing
▶︎ Credit spreads seem more or less contained, the Corporate Bond Market Distress Index is lower
▶︎ No signs of stress from equity volatility and options
▶︎ Market breadth is looking pretty decent
     >>BEAR<<
▶︎ Short-term: correlation between ES and VIX is high which is a warning sign for a top in equities
▶︎ Global and Asian PMIs are weakening further (notable exception: India)
▶︎ Energy futures are still lagging the China trade
▶︎ US treasuries have started to perform: it still looks like a trade on a Fed pivot with treasuries rising when everything else is but it could quickly become a play on softer growth
▶︎ Six out of eight G8 2s10s have so far inverted
▶︎ Fear & Greed is at Greed (but far from extremes)
     >>SUMMARY<<
The market feels slightly more bullish than last week overall, breadth is improving, volatility has come down with VIX below 20, metals performing, energy catching up, and so on. I'm still not going to commit to a bias, though, because I find the whole situation very unclear. 

***** USD *****
     >>BULL<<
▶︎ The economy is resilient, it's still growing and the labour market is showing no sign of softening
     >>BEAR<<
▶︎ 25 bps for February are priced in: it's still a hike but it looks dovish, and Fed speakers haven't been helping here
▶︎ Inflation and inflation breakevens are trending lower while real yields are going nowhere
▶︎ CESI for the G10 has been improving for months now... this doesn't square with the Dollar Smile at all
▶︎ CSII continues to go down
▶︎ The China reopening should be bearish USD
▶︎ PMIs have been disappointing
▶︎ Treasuries have bullish COT positioning which could weigh on yields (pared back a bit this week, though)
▶︎ The market is still very long USD (according to PAIN) or at least not extremely short (according to COT)
     >>SUMMARY<<
Last week I wrote that having taken a break feels good because it allows for a fresh look at things, and I think that's what I needed to do with the dollar: my medium-term long bias was mostly based on the dollar smile with weaker global growth and the US outperforming. That's just not what's been happening over the last few months (see the G10 CESI and China reopening). I'm removing the medium-term bias.

***** EUR *****
     >>BULL<<
▶︎ The ECB looks comparatively hawkish, and they will likely continue hiking while the Fed (and others) pause
▶︎ Bear flattening in 2s10s continues
▶︎ Fragmentation risks seem to be either contained or the market isn't caring about them for now
▶︎ The mild winter has completely soothed fears of an energy shortage
▶︎ CESI is going strong
▶︎ PMIs have been surprising to the upside and have been less bad than feared
▶︎ Stock markets are outperforming
▶︎ Seasonality is bullish
     >>BEAR<<
▶︎ Positioning is at bearish extremes
▶︎ It's not profiting as much from the weak dollar as expected
▶︎ Not sure what it would take for the Ukraine war to spook the market again: Belarus attacking, another mobilization... not sure but it's still a relevant risk

     >>SUMMARY<<
Same as last week: A lot more bullish arguments than bearish ones. The extreme in positioning has me a bit worried, and I wouldn't want to be long on a higher timeframe because of it but for short-term trades I'm looking to play it from the long side.

***** GBP *****
     >>BULL<<
▶︎ A bit of hawkish BoE-speak this week
▶︎ Another batch of data this week that surprised to the upside
     >>BEAR<<
▶︎ The inherent strength it has shown for the last few months seems to be weaker
▶︎ The economic outlook is bleak, they expect to be in a recession for the entire year
▶︎ The entire country seems to be in disarray with everyone on strike and people being squeezed 
▶︎ Dovish central bank with two dissenters at the last meeting
▶︎ CESI has rolled over and is heading lower
▶︎ Weaker on the PMI heatmap
▶︎ Even if its 2s and 10s look decent, they aren't driving it at the moment (negative correlation)
     >>SUMMARY<<
It feels like 2022 happens all over again: the fundamentals are bad but it's just looking through all of that and trades higher.  The correlations with ES and VIX make it look like a risk-on/risk-off currency, so I have to take that into account.

***** AUD *****
     >>BULL<<
▶︎ CPI upside surprise this week
▶︎ It has started to perform somewhat... not sure why now when it did so poorly over the last months: Chinese reopening finally catching on?
▶︎ OECD CLI has it outperforming

     >>BEAR<<
▶︎ Weaker PMIs for Australia and most of Asia
     >>SUMMARY<<
The stronger CPI seemed significant at first but the RBA has looked through a print like that before, so I'm not putting too much weight on it. AUD has been trading better than expected but I don't feel like that's enough to change the bias.

***** NZD *****
     >>BULL<<
▶︎ The China reopening should be positive for NZD with tourism catching a bid
▶︎ The RBNZ is decidedly more hawkish than the neighbouring RBA
     >>BEAR<<
▶︎ Positioning is bearish
▶︎ CESI has rolled over
     >>SUMMARY<<
I'm changing the bias to neutral: it's underperforming AUD, the China trade seems to be over already for NZD, and the economic data has weakened. My model indicates a short bias for NZD, and it would make sense because AUD and NZD have been virtually uncorrelated for a while, but I'm not a machine so I'll treat them as equals for now.

***** CAD *****
     >>BULL<<
▶︎ CESI is going higher
▶︎ Positioning is bullish
▶︎ 25-delta risk reversal seeing it stronger
     >>BEAR<<
▶︎ The BOC has practically announced the end of their hiking cycle
▶︎ It's inherently weak
     >>SUMMARY<<
The economy is doing okay, the last two CPI prints mostly surprised to the upside, so I wonder whether my assessment of the BOC being dovish might turn out to be wrong, especially since CAD looks pretty oversold and vulnerable to a hawkish surprise. Still not enthusiastic about it since it hangs on the USD.

***** CHF *****
     >>BULL<<
▶︎ PMI still green on the heatmap
▶︎ Sentiment is bearish (listed that on the wrong side last week)
     >>BEAR<<
▶︎ Its performance is still mediocre-to-bad
▶︎ CESI is glued to its floor
▶︎ Last inflation print was deflationary and surprised to the downside, CSII is falling
     >>SUMMARY<<
Unchanged from last week: It's not a heartfelt short because of the high correlation to EUR (about 0.6 over 100 days) but then it hasn't been as strong as I had expected it to be for months last year. It has a relevant negative correlation to the ES of about -0.5, so I'll treat it as risk-on/off mostly.	

***** JPY *****
     >>BULL<<
▶︎ More hawkish news from the BOJ (about a review of the side-effects of their easy policy)
▶︎ The latest BOJ decision was an unexpected and hawkish surprise despite the verbal pushback
▶︎ Widening of the YCC band looks like a first step, yield differentials are narrowing
▶︎ The nomination process for the succession of Kuroda will take off in a few weeks, the market seems to be taking it as hawkish
▶︎ Positioning still has a pretty long way to go until it ""normalizes""
▶︎ Inflation has been surprising to the upside (not showing up in the CSII, though)
▶︎ OECD CLI outperformer
     >>BEAR<<
▶︎ Still the most dovish central bank out there
▶︎ Bullish sentiment
     >>SUMMARY<<
I don't know enough about the JGB market to make an educated guess whether the BOJ will make a back-to-back change to their policy next week. But it's what the market is trading at the moment, and it feels as if everyone is a bit too excited. Also, the move is getting extended even though positioning-wise there's still quite a way to go until things normalize. It's still a long because that's the way of least resistance until the BOJ rate statement in my view."