I exited USD longs too early, obviously. No reason to go short yet but we are approaching massive levels in almost every currency.
The Unuktitut character set is cool.
It is the writing system used in
Canada by Inuktitut-speaking
Inuit of the territory of Nunavut
and the Nunavik and
Nunatsiavut regions of Quebec.
February 24, 2023
Today is corporate month end and my decision to square up the USD long view yesterday was early or wrong. The most interesting result of my square up email was that I got a ton of “amens” and not much pushback. This is interesting.
The market is still biased to the USD short trade and the question still seems to be “when does the big USD down trade resume?” and not “how can I make money long USD?” This is an interesting bias in the market. With yields up here, corporate month end today and real money month end next week, USD buying looks set to continue for a bit. Stocks are down 2.4% this month so the month end signal will be a medium sized buy USD.
I should have written about corporate month end yesterday, but I was travelling so I did not have my Spectra Markets Trader Handbook handy and thus I forgot today was corporate month end. It is uncommon, though not unprecedented for it to fall on the 24th. It is usually much later. For fun, here is the distribution of corporate month end dates over the past 23 years. It’s weird that the 27th happens more often than the 28th.
Anyway, here is how GBPUSD and USDJPY perform on corporate month end since 2010. You can see that the effect remains in place though it has become less powerful since COVID as the market is more aware of it and positions quite religiously. As an anomaly becomes well known, it gets arbitraged away as smart corporates go early to get ahead of the rush and specs are already positioned for the mechanically-timed flows.
We are getting to some big levels in the USD. Starting with USDCNH. You can see we cleanly took out the 200-day today but now approach the key 6.98/7.01 pivot that formed the bottom of the range in Q3/Q4 2022 and the top of the range going into 2023. And the 100-day is right there, too. Was the whole China reopening trade just a red herring?
The AUDUSD chart looks similar. You have a clean break of the 200-day, the 100-day right here (0.6724) and we are nearing the 2023 low of 0.6688. Those purple lines mark another major support zone 0.6600/30.
As discussed yesterday, I don’t think the risk/reward of long USD is very good here. I think we are in the last stages of pricing in a higher terminal rate and we are now fully priced for three Fed hikes (March is priced for 32bps). Yes, the market could price in 50bps if it wanted to, but the only way I see that happening is if the March 14th CPI figure is high. Yes, PCE was strong today and yes, PCE is the Fed’s target and it matters. But every other January inflation figure already came in hot so I am not sure this is a watershed data point.
All that said, it’s too early to consider short USD as corporates need to buy their USD today and there will be residual demand for USD all the way until Tuesday at 11am. And I don’t know what the thesis is for short USD anymore. China reopening has lost its mojo and the USA is rocking. So, I’m flat for now and I’m going to wait for some new inspiration.
Have an ice cold double double weekend.
Tim Horton’s Iqaluit
