As housing-centric economies like Canada and New Zealand enter mildly restrictive interest rate territory, the currencies look vulnerable. Owning vol there looks sensible, especially given vol and equity seasonals. 3-month 1.33 USDCAD digital, for example.
Not much of a race
Stop loss 4366
Take profit 4010
We are getting to the place in the cycle where it’s less obvious that rate hikes are raging good news for the currency. Yesterday’s strong Canada CPI and the apparently hawkish overnight hike from the RBNZ have not benefitted the respective currency as the dollar remains the all-weather stalwart whether stocks go up, down, or sideways.
The first chart today shows the evolving estimate of New Zealand’s neutral interest rate from ANZ. The chart is a bit out of date, as the OCR is now 3.00, well above most estimates of neutral. 2-year yields in NZ are closer to 3.4%.
Canada’s neutral rate is estimated at 2% to 3%, while the overnight rate is headed to 3.0% or 3.25% in a few weeks and 2-year yields are similar to NZ, around 3.4%. In both cases, we could be approaching mildly restrictive policy in economies that are highly-levered to real estate.
As mentioned yesterday, I like buying vol in CNH, NZD and CAD because the next 10 weeks are a time when vol often pops, and those currencies look most vulnerable now that EUR and GBP are priced for energy Armageddon.
CAD is supposed to have a beta to stocks and oil, and yet we first saw crude move from $60 to $130 in crude and now SPX just rallied from 3670 to 4325 and USDCAD is unimpressed and still way up at 1.2900. CAD looks extremely vulnerable into year end and the overnight action in NZD supports that view.
Chasing the housing crash trade in Canada has been the equivalent of the short JGB trade for the past 10 years and I’m not calling for some huge crash in housing. I’m just saying CAD can easily reprice to 1.33 or 1.34 on the back of rising concern over high rates. Similar to Q4 2018 when USDCAD went from 1.28 to 1.36. Everyone knows the story of huge consumer debt and excess exposure to real estate, and it only matters when it matters. To me, it looks like it’s going to matter. Buy 3-month 1.3300 digital in USCAD for around 20% (for example) makes sense to me. It’s a bit long term for the sidebar, so I won’t put it in there, but I think it’s a very high EV trade.
The simple boiled down thesis here is that USDCAD should have gone down on the rip in oil, and it should have gone down on the rebound in stocks, and it should have gone down on the strong CPI. And it didn’t. And now it’s ready to rip.
If you were ever going to take a shot at short S&Ps, this is the time. Sentiment has come from 2008 levels of apocalyptic bearish angst to full-on meme stonk squeezorama in four weeks. The 200day is right here (see purple line on the chart). The trendline off the two tops is right here (green line). The quintuple top from May false broke and is now back below (orange line). And the old support and gap down from late April is at 4360 (blue line).
And yields are ripping again. Short S&Ps with a 4366 stop loss makes a ton of sense. I’m adding that to the sidebar.
If you’re FX-centric, and agree SPX is toppy, long USDCAD, long USDNOK, short AUDUSD and short NZDUSD all make sense to varying degrees.
In case you were thinking about it, there is no borrow on Bed, Bath, and Beyond. You can’t short it right now.
And finally, I have included this week’s sentiment vs. confidence survey results on the next page. It is part of an ongoing investigation I am doing into the relationship between forecast confidence and accuracy as part of my 50 Trades in 50 Weeks Substack. Enjoy!
Have an unpredictable day.
Sample size is 170
HT MG
This piece is mostly for people who are interested in backtesting
