Nominals and real yields could put pressure on carry, including the crowd favorite: MXN.
Go shorty. It’s your birthday.
Top 10 songs twenty years ago today
“Right Thurr” by Chingy is probably
one of the worst songs to ever
disgrace the Top 10 in any era
13JUL 17.25 USDMXN call
at 27bps off 17.08 spot
Short EURUSD @ 1.0945
Stop loss 1.1126
Take profit 1.0711
July 6, 2023
The USD move lower pre-ADP was a bit odd today as the rebound in the EUR could be attributed to the pop in German Factory Orders, but the drop in USDJPY defied explanation. The only ex-post explanation for USDJPY is that it rallied from 139 to 144 with yields unchanged for most of June and so a drop from 144.60 to 143.70, despite higher yields, is forgivable. You can see in the first chart today that USDJPY created a gap as it rallied starting June 22nd and that gap has now been closed by yields up / USDJPY down.
The end result is that perhaps USDJPY looks weird today, but on almost any other time frame it looks pretty reasonable. And if you zoom out to early 2023, you will see that the last time yields were here, USDJPY was 137. So today is just giving back a bit of outperformance.
The move becomes more interesting in the context of yesterday’s mini blowup in EURHUF because the one place there is a big position in FX is in long carry. EURHUF unwinding yesterday and USDJPY trading weird today before ADP is interesting and probably symptomatic of carry portfolio unwinds. Markets have assumed that vol will remain low for the summer and thus it’s a good time to extract as much carry as possible. HUF has leverage to Europe, and things don’t look amazing in the EU. So that was the first one to go.
But now, with nominals flying and US 10-year real yields back at the highs, there could be more pain. As most people know, the big money in long carry is in LATAM because real rates there are high and you get leverage to reshoring and US economic outperformance. Therefore, if carry is to undergo a real correction, MXN will be at the center of the storm. Tech-wise, USDMXN is in a series of three Russian nesting doll style falling wedges.
Long carry environments can be prosperous for months and months and even years. That said, the blowups can be spectacular and they don’t always require an exogenous shock because the endogenous setup (lots of levered positions with similar exposure and risk management parameters) can trigger the unwinds. I would be extremely cautious if long MXN right now, whether it’s short USDMXN or EURMXN or long MXNJPY. All three have been popular ways to play the carry.
If you are a short-term speculator, this is a reasonable place to take a shot long USDMXN. The stop loss is close, at 16.94. That would be a new low for USDMXN and usually if you are trying to take the other side of a carry trade, you need sharp tactics and a fairly tight stop loss or you will bleed to death by a thousand negative carry cuts. If USDMXN gets legs, it could go to 17.40 in a heartbeat and 17.60 on an overshoot. With NFP tomorrow, a 1-week 17.25 makes sense (as opposed to spot, which is much harder to risk manage through data) as I think another strong jobs number will trigger some serious malaise in the rates market.
Buy 1-week USDMXN 17.25 call for 27bps, approx.. off 17.08 spot. Price is super ballpark as spot and vols are all over the place. I have put that in the sidebar as I think the risk/reward is excellent.
To summarize:
Fading carry is like shorting a bubble. You take your shot and hope for excellent timing. It’s a short-term trade and that’s it. If you are the type of lion that would prefer to go after the stumbling gazelle, not the strongest one, you could also go long EURHUF or buy 1-week EURHUF topside.
When your business model is selling expensive items to China, this seems bad.
Have a miraculous day.
Miracles by Insane Clown Posse.
Objectively bad songwriting and worst-in-class rapping from an
easy to make fun of band that I would still argue is underrated.
They have some good songs!
This is not one of them!
https://en.wikipedia.org/wiki/List_of_music_considered_the_worst
