Still

Waiting for Wile. E. Coyote to drop

It continues to feel like the market is most concerned with staying set up for the inevitable relief rally (and USD selloff) and is much less interested in trades that make money on continued escalation or USD strength. We are in this strange market where it feels like so much is going on and yet many critical assets have gone nowhere. For example, AUDUSD gapped higher through 0.6900 on Sunday, January 25, and has held that level but gained just 1% since.

I will come back to AUD later and explain why I think it is going to break down and take out that 0.6900 support soon. Meanwhile, the epicenter of equities, making up 7% of the entire S&P 500 and 13% of the NASDAQ… Has gone nowhere in eight months. $170/$200 captures about 95% of all the price action since last August.

Despite some r/wallstreetbets madness, gold and silver are flat on the year. So are EURUSD and USDJPY. But of course, oil and fixed income have moved a ton, so it’s not all zero vol whipsawmania. Here are the changes in major assets this year, normalized for “How many average day’s ranges has it moved?”

Short Schatz, long oil is your winner. But I think many of the assets in the super light red and super light blue zone are the surprises. Anyway, at the risk of getting stuck in a view, I continue to believe that despite the mouth-watering prospect of a binary resolution to the war, it’s higher EV to play for continuation, escalation, and equity downside. It’s easy to forget about the constant drumbeat of private equity gates, tightening financial conditions, and plummeting gold and silver prices, but ultimately higher rates and worse liquidity should flip open the equity trapdoor at some point.

Sure, sentiment is getting bearish, and we have moved. In fact, the NASDAQ, S&P 500, and NVDA are all now below their 200-day moving averages. But the moves have been grinding, trending kind of moves that don’t yet have any whiff of capitulation. Volumes have not been all that exceptional, VIX is not particularly zippy, and the put/call ratio is midrange. If the S&P and QQQ recapture their 200-day MAs or Brent Crude closes below $95 (as discussed yesterday), I will probably give up on the bearish equity view.

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AUD

I put on the AUDUSD put spread last week, and I like it even more now because:

1. Equity view. If stocks go lower, AUDUSD tends to go lower. This is not always the case, but an environment of falling gold and falling stocks is almost always bearish AUDUSD. Since 2000, for example, if stocks and gold are both down 2% in a 4-week period, for example, AUDUSD was up 8 times and down 66. With financial conditions tightening and no clear off ramp for the war, I think we continue to see lower gold and lower stocks (and lower AUD).
2. AU monthly CPI tonight should be negative. The monthly frequency is fairly new for the official CPI in Australia, so there is no forecast in Bloomberg. But I think it’s reasonable to say that a negative monthly print will not encourage those that are trading for a hawkish RBA and rising Aussie inflation. TD and the Melbourne Institute have been publishing their own monthly CPI figure for Australia for years, and it tracks the newer official monthly data very well. It points to -0.2% tonight.

3. Corporate month end this Friday (buy USD).
4. Real money month end next Tuesday (March 31). With S&P 500 down 4%, NASDAQ down 3%, and Russell down 5% this month, real money hedgers will need to buy USD. And sell AUD.
5. There are still large CTA and macro longs in AUDUSD because the price hasn’t moved. See chart below. There is a certain cohort in the market that will never capitulate until price tells them to do so. Below 0.6900, these people and computers will start to sell AUDUSD.

I am wrong all the time, but I will say that this is about as high conviction as I get. Positioning, flow (big sellers coming) and narrative all align nicely. The techs are rangebound but cooperate bigly if 0.69 breaks. I think you can still buy 02APR 0.69 puts here and make good cash. Nothing is certain in life, and this is not investment advice.

Out of curiosity, I ran the AUDUSD matrix vs. SPX and XAU to see how things look. Recall this is a new tool we built (ok, Justin built it) to look at how an asset performs conditional on two other assets. I think it’s much more useful than looking at correlation or multiple regression models because it doesn’t assume linearity and it doesn’t boil everything into a single number the way r-squared does. It is much more textured and nuanced. I will call it DUALCORR. If you are a statistician and I have reinvented the wheel here, let me know! Blank areas mean that thing didn’t happen in the data set.

AUDUSD win rate looking at 4-week performance of XAU and SPX

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Final Thoughts

1. The war is stagflationary, Anna Breman edition.
2. Karpathy on where we are in the Frontier model race. I didn’t understand much of it, but what I did understand was useful. The interviewer is excellent.
3. Excellent post from Tim Ferriss. Self-help is great but… If you look inward too much you can get trapped in there. Relationships and real-world interactions are the thing. Self-help is not the thing.
4. For 20 years, I have been linking songs in the title of am/FX if the title references a song, and I think maybe three people have actually found the song by hovering over the title accidentally.

I hope your day is so money, you don’t even realize how money it is.

The largest banknote in each G20 nation, converted to USD

500-euro notes are legal tender and retain their full value, but they are no longer issued. Production stopped in 2019 to combat illicit activities, yet existing notes can still be used for payments or exchanged at central banks indefinitely.

good luck ⇅ be nimble