Too many faders

Iran

My first observation today is that the market has seen enough of these geopolitical events come and go that the initial vibe last night was to fade everything. This has become a Pavlovian reaction as the world has become accustomed to the idea that Nothing Ever Happens. History shows that fading the Sunday gaps is a profitable strategy but my feeling is that this has become way too obvious and kneejerk, and current events do not necessarily warrant such a blasé attitude. This is not some one-off airstrike like June 2025 and it’s not an easily-won war like Iraq in 1991.

There have already been some significant round trips in markets as KORU (the 3X Korea ETF), for example, closed at $630 Friday, opened at $580 last night then rallied immediately back to $630 by 9 p.m. It’s now trading $550. Same deal with silver, which opened at $96, then attracted the faders who sold down to $92, and is now back up to $95.50.

The moves in FX are modestly surprising as EURAUD is lower, USDILS falls, EURJPY higher, USDJPY ripping, etc. Pity the person with inside information on Iran attacks who traded it via FX. Higher U.S. 2-year yields is also a bit of a head scratcher as the market seems to be going with the inflationary impact story, not the consumption and real wage shock angle.

The critical variable for markets from here is the market’s perception of the duration of the conflict. It’s simple:

A prolonged war is bad. A short one is good.

Markets initially rallied on the weekend when the death of Khamenei was announced but then soon realized that there are plenty of people in line to replace him and the decapitation strategy is not as clean as everyone might wish.

Khamenei was 86 years old, and a follow-up Israel/U.S. attack has been a possibility since June 2025, and so the natural death or martyring of Khamenei is not something that was completely unforeseeable in Iran.

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Mexican Peso

Much as an entire generation of traders has been raised on the idea that you fade everything because nothing ever happens, the last two years have rewarded relentless buying of MXN and BRL, no matter what the backdrop. I could see both these reflexes being wrong here and I would not be surprised if we saw a painful and violent rally in both USDMXN and USDBRL.

USDMXN has been making a huge base since bottoming on January 27 and looks ripe for a meaningful rally.

If you read am/FX most days, you will remember I have been mentioning the impossibly high Sharpe of USDMXN and how that makes it ripe for a correction. That was not enough to do the trade, but I have been monitoring USDMXN for a possible catalyst for a while and my feeling is that the complacency around this war in Iran could be it. Markets care when they care and they don’t seem to care that much yet. But if this drags on and quick victory looks anything but assured, I think USDMXN could have a moment.

It’s tempting to buy 1-week 17.50s for about 36bps, but I think the expected value of trading spot is higher because there are quite a few scenarios where USDMXN chops and goes nowhere, a few where it skyrockets, and not many where it craters down to new lows. So I am going long USDMXN here (17.3550) with a stop loss at 17.0440.

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Calendar

Iran obviously more important than any of this stuff.

Positioning report and large strikes below. Remember to maintain perspective. Whatever your P&L is today, people’s sons and daughters are dying in the Middle East.

Hi. Welcome to this week’s report. A big move into short GBP has turned the overall positioning score to long dollars, though I would caution that many bank reports show CTAs still mega short dollars. While our scale goes from -10 to +10, the nature of the way we average out six series means that -5 is a significant and extreme reading. This might explain the confusing strength of GBP today.

good luck ⇅ be nimble