EURGBP, CAD and Naz

June 12, 2023

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EURGBP, CAD and Naz

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First up, despite what I said on Friday, I’m squaring up the EURGBP here. I still think EUR crosses trade heavy into ECB, but I don’t have an edge on the UK data tomorrow. It seems to me that the economists are jacking their UK wage growth estimates higher because of the April 2023 rise in the UK minimum wage and therefore there could be downside risk to the release (similar to the setup in April 2022).

Last April, UK minimum wage rose 6.6%, the survey called for 3-month UK wage growth of 7.4% and the number came in at 6.8%. It’s difficult to model how a minimum wage hike will impact the wages data and there are so many other variables involved. As such, I don’t want the risk that economists are making the same mistake again this year. Note that the UK minimum wage rose from 9.50 to 10.42 in April 2023 (+9.7%).

Also, and perhaps more importantly, the divergence between nominal yields and GBP has disappeared. It is no longer cheap. The main point of my bullish GBP thesis after UK CPI was that nominals will drive GBP higher and stagflation trades after CPI will not work. This has resolved now. The top panel in the chart below shows EURGBP and the bottom panel shows GBPUSD vs. rates. You can see in both cases that rate differentials decoupled because people were trying to do the “Sell gilts, sell GBP” trade. But then, over time, money was lured into GBP by the juicier nominal yields in the UK and the divergence closed.

Especially as I’m sympathetic to the bigger picture bearish story in the UK, I don’t want to be long GBP through important data where wage growth expectations are high and yields and the currency are no longer dislocated. For a nice enunciation of the bearish UK story, check out this post from Joey Politano. If GBP is going to put in a major top and make the bears’ dreams come true, weakness in tomorrow’s data would be a logical starting point, especially with GBP near its strongest level in months.

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USDCAD

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Meanwhile, USDCAD vs. oil looks like this:

USDCAD vs. NYMEX Crude Oil (inverted), Hourly November 2022 to now

Note the current setup looks a lot like the big dump to 1.3300 in May (when oil remained weak). Then again, you could argue the correlation has been close to zero since the decouple in May and maybe oil doesn’t matter as much for CAD as it used to. Especially with credit trading well, VIX sub-15, and so on. I still think it matters, especially with USDCAD at the bottom of an epic range.

It’s a tough call whether to hold it through US CPI. The disinflation narrative has certainly taken hold and so my guess is that a strong CPI will hit much harder than a soft one. Measures like Truflation and the Adobe Price Index are pointing to much lower inflation, but inflation calculations involve so many assumptions and inputs that to say one is more accurate or more “correct” than another is not particularly realistic. They’re all black boxes. We can predict the drop in the shelter component of CPI because it lags the real world by 12 months or so, but rents were still rising rapidly in May 2022, so there is unlikely to be relief there yet.

I’m scared of a weak number tomorrow, but barring a change of heart overnight, I’m sticking with the view that USDCAD will hold the bottom of the range. The asymmetry in both CPI reaction and USDCAD should be upwards—CPI simply because the disinflation narrative has become much more entrenched / consensus and USDCAD because of where oil is trading. If you have any strong view on US CPI actual vs. consensus and why it might deviate, please email me.

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Naz Numerology

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This is mostly for fun because the sample size is way too small to ascribe real significance—could easily just be fooled by randomness. But my friend JJ pointed out that stocks have turned just before quarterly expiry, every quarter since January 2022. Here is the chart back to 2021.

NASDAQ with Monday of quarterly expiry week marked

The next chart shows the P&L of looking at (do the opposite of whatever happened in the 10 days leading into the Monday before quarterly OPEX and cover 10 days after OPEX). So right now, stocks are up over the past 10 days so this silly model would say short NQ and cover 10 trading days after this Friday. Again, I know this is kind of random, but the rhythmic, cyclical turning of equity momentum at quarterly options expiry has worked seven quarters in a row back to September 2021 so it’s at least interesting if not statistically significant.

P&L of fading 10-day momentum on Monday before quarterly OPEX and cover 10 days after OPEX

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Final thoughts

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It is essentially unanimous inside and outside the world of crypto that bitcoin is not a security. This is a big competitive advantage for BTC. As the OG digital gold, BTC also has essentially no competition for its primary use case. Every other cryptocurrency, including ETH, has competition. And every other cryptocurrency, including ETH, could be declared a security by capricious US authorities who are now clearly on the warpath. I’m not saying this in hindsight; I have been saying this since 2021.

I have long believed and continue to believe that BTC is in a separate class from the rest. It’s got no competition and very little US regulatory risk. And I don’t really see the prosecution or persecution of US centralized exchanges as relevant to the price of BTC. Much like if NYMEX went bankrupt, you wouldn’t sell oil.

Have a properly-ordered day.

good luck ⇅ be nimble

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6 ÷ 2(1+2) = x

 

The answer is x = 9.

Many people get an answer of x= 1.

 

If you rewrite it as this equivalent expression:

6/2*(1+2) = x

It’s easier to see why x is 9.

 

Full explanation here.

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