Bullish bonds only works if you think we are in a post-1990 inflation regime. Turkey dinner might make you sleepy but not because of the tryptophan.
Cyberpunk crypto trader
faces the pain of loss (2022)
Digital art by Brent Donnelly
(…ostensibly?)
Image generated via Midjourney
AI using text prompt
Stop loss 111-15
Stop loss 0.6811
Take profit 0.6555
November 22, 2022
First, my histogram yesterday showed curve inversions since 1994 are generally a great time to be long bonds. 1994 is near the start of the epic bull market in bonds and massive disinflation of the Great Moderation, but the only reason I used that starting point was that the data series I was using for 3m/10y curve only went back that far.
JS did his homework and suggested to me that my sample (1994 to now) could be biased. So, I looked at the same thing for 1960 to 1993. To understand the chart below, you need to have read yesterday’s am/FX. But an important note here: because of the way the super old data is collected, today’s chart shows change in yield, not price. The question it’s asking: If 3m/10y is inverted today, what do yields do tomorrow?
You can see that the distribution is all over the place with fatter tails during times of inversion, and a small bias towards HIGHER yields. Here’s the win% for each condition:
The implication here is that for 3m/10y to be bullish bonds, you have to assume we are in a post-1980 regime here (disinflationary). If we are in a pre-1980 regime, inversion isn’t necessarily bullish bonds. That’s a huge assumption!
I forgot about this Friday’s CPI in Japan, but Steph was kind enough to remind me. Thursday, just as Americans transition from Turkey to pumpkin pie, Japan releases Tokyo CPI. For the record, despite common knowledge to the contrary, the L-tryptophan in turkey does not make you tired. But consumption of mass quantities of food does.
Studies have indicated that stretching of the small intestine induces sleepiness and a protein–fat loading of the stomach induces sleepiness,” says biologist H. Craig Heller at Stanford University in Palo Alto, Calif., “and, more blood going to the gastrointestinal tract means less going elsewhere,”—for example, the brain or skeletal muscle.
Anyhoo, here are the two Tokyo CPI series against the national CPI figures for Japan. The national data does not come out until December 22. Note that Tokyo CPI has been moving a few months ahead of national figures as you can see. The BOJ’s target is 2% headline inflation and headline has been above that since May. There are definitely inflationary vibes in Japan.
While the Thanksgiving data points are unlikely to move Kuroda-san off YCC, they could be another brick in the wall for the Great Yen Rebound of 2023. Make sure you sneak away to the bathroom and check your Bloomberg at 6:31 pm NY time on Thursday.
Markets feel a tad holidayish and random at the moment with yesterday’s massive reversal in oil on the Saudi denial, stocks bid, USD mixed, AUD weak, NZDCAD strong, bonds unch, and copper finding a base. I have a feeling cross/JPY could be in play in 2023 after being useless in 2022 (because it was just a low-beta JPY play). A 0.6550/0.6700 range should cover the AUD for the rest of the week.
What’s your favorite trade from now until June 2023? Please email me.
Today is Tuesday, so you’ll find the weekly Spectra FX Positioning and Momentum Report starting on the next page.
I am so bullish AI, I wish I could clone myself and start an Applied AI consulting firm. Have a lossless day.
Choppy markets since CPI as players digest a flurry of conflicting information about China reopening just as the global economy looks tired and the US economy soldiers on despite housing and auto malaise. Each recent narrative has lasted just a few days before fizzling and some markets are now close to testing their CPI Day gaps. Consolidation.
Here are this week’s positioning and momentum scores:
1. EURUSD’s failure at the 200-day moving average, some dovish ECB comments, and disappointing COVID noise have sucked the air out of USD selling momentum. Momentum remains modestly on the side of USD shorts, but the second derivative has slowed.
2. Options markets have not responded much to the rebound in the dollar as this correction of the correction sets up for consolidation and chop, not a new trend. Of particular note, the risk reversal in USDCAD has not reacted AT ALL to the big rally in USDCAD. This suggests speculators are not re-engaging in bullish USDCAD structures like we saw in late September / early October.
You can see from the chart that on that rally in USDCAD, specs went Beast Mode buying topside, pushing the risky from +1.5 to +2.5 in a few short days. The risky then fizzled back to +1.0 on the big USD turn and has stayed down there. This is bullish USDCAD as it shows spec participation from 1.3250 to 1.3450 has been limited.
3. It’s rare to see bullish sentiment in NZD and bearish sentiment in AUD from the same cohort at the same time but that’s what we have seen in the past two weeks. Retail traders are bullish NZD and bearish AUD and the CFTC has been buying NZD and selling AUD. There was a big, popular AUDNZD long trade out there for a while and perhaps this is residual unwind momentum. NZD trades well vs. peers. It is particularly notable that NZDCAD has not gone down in the most recent USD rally (NZDCAD usually has significant beta to USD moves because NZDUSD is usually more volatile than USDCAD).
4. USDJPY and AUDUSD both put in a false break of the 100-day moving average and trade on the stronger USD side once again. This is more a signal of chop and consolidation than a reason to resume USD bullish trades. Here’s the false break in USDJPY, for example:
5. It is hard to understand what is motivating the interest in CHF shorts. Confusing.
1. Last week, Tom Brady dropped the laser eyes, and a few days later, The Economist dropped a bearish crypto cover.
In June 2022, I wrote a list: “Eight signs of a crypto bottom,” and item #7 on that list was: “The Economist publishes a bearish crypto cover.” We now have ticked off 5 out of 8 signs. Full list here.
Crypto is in the throes of a slow-motion, cascading Lehman Brothers-style moment where all the interconnected entities that make up the house of cards fall, one by one. But in this version of history, there is no “Too Big to Fail” and there will be no panicked meetings held in the wee hours of the weekend at the Eccles Building. And unlike John Thain and Ken Lewis—SBF and the other kings of centralized crypto will not receive bailouts.
The kneejerk response to this cover might be to buy BTC, but remember that the payoff on contrarian trades motivated by covers of The Economist is generally 6 to 12 months out. One final epic collapse could be necessary to cleanse the deep stains left by FTX. While more and more signs are accumulating that the bottom is near… “Near” doesn’t mean “here.” The path to the final bottom and the low print are important considerations. GBTC, Genesis, DCG, and other issues still hang in the balance as potential post-FTX aftershocks. I would rather buy a crash than this grindy downtrend.
Two more things to consider: November 26 is the average seasonal low point for BTC (and the November 8 seasonal peak worked well). Also, the bitcoin halving cycle turns bullish soon. With Fed policy also looking close to pause mode, there are good arguments for buying the climactic dip in BTC. Good luck timing and risk managing it, though.
2. Engagement in FX over the past week has been high from fast money and spot trader types, and low from bigger picture macro. It’s a good tactical punting environment with no coherent big picture narrative. The script for 2023 is not yet clear and anyway, it’s a bit early for people to put on new year trades. Expect aggressive recession bets if we get some clear signs of weakness in the US economy.
There are many recession signposts out there right now, but not enough evidence of US economic weakness yet. Residual US economic momentum is keeping people from shoving chips into the pot. So far.
That’s it for this week!
Thanks for reading.
This piece is mostly for people who are interested in backtesting
