TOtB and USDKRW

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Currencies

The ceasefire ceased and has now resumed, and the price action tells us that nobody is interested in trading the War in Iran just like nobody is interested in trading fiscal panic 2 in the UK. The rise in Miliband odds has had no impact on GBP whatsoever and now we have rallied a bit on Burnham’s presser today, but overall, it’s just a nothingburger. The theme is U.S. Exceptionalism and whether or not Warsh will follow through on his hawkish opening gambit.

If Warsh is moving away from a forecasting framework and closer to a spot data framework, you can definitely argue for a hike. If he’s bluffing because that’s what you are supposed to do on Day One when you’re a new Fed chair, then he will slow play the hike long enough for inflation to drop below 3% and say, “no need for hikes.”

I spent most of last week writing about why I think Warsh is bluffing, but I suppose I better keep an open mind. If NFP comes in strong, there could be a pretty good argument for an insurance hike at the July meeting if Warsh wants to send a message to market. The logic of “if we hike now, we won’t have to hike as much later” is somewhat sound and while Warsh sounded dovish when he was pointing at trimmed mean instead of PCE, he was a hawk throughout the early 2010s and the end result here could be more of the same (fake commitment to the inflation target a la Powell Fed) or something completely different.

I still lean towards the idea that Warsh will slow play the hikes and never have to hike at all, but who knows.

All this to say that July NFP takes on more meaning than it should because if Warsh wants to send the message that he is serious about the inflation target, it’s much easier to justify if we get another strong jobs report. I find the discrepancy between breakeven jobs and actual NFP a bit hard to believe given Initial Claims and other reports, so my lean is towards a less hot number like +33k.

Given positioning in SOFR and DXY, the asymmetry on NFP is a weaker USD and lower yields. Followers of our positioning report know that when it gets to +5 or -5, it tends to be a good reverse indicator… And we’re there now.

Interesting how this position build didn’t lead to as much dollar appreciation as past builds

One more bearish USD trade idea I have: Short 1-month USDKRW here (1543) with a stop at 1571 or buy 2-week put spread 1530/1505. I like the put spread best because you get a lot of leverage and you are insulated from having to stop out in cash on a strong U.S. jobs report in a shortened holiday session. Paying 37 bps for the put spread lets you risk around 37 to make 163.

I have written in the past about how short USDKRW has been a very popular and very unprofitable trade for months because whatever KOSPI does, the market finds a way to explain why it’s bad for KRW. The reality is that the main reason USDKRW hasn’t worked as a short, despite compelling macro scorecard characteristics, is it’s a USD trade—and the USD has gone up. If you simply overlay USDKRW and DXY, you see what I mean. On a daily chart, there is consistent leakage vs. where you would think it would be (KRW is weakening) but on any time frame I trade, the two move in lockstep. So, you can think of USDKRW as a USD trade with some weird idiosyncratic characteristics.

See chart.

I am moving into short USD bit by bit, and I think it’s a good time to add the Korea as idiosyncratic factors are about to turn in its favor. SK Hynix is doing one of the largest equity raises in history, in USD, and the company is raising money to spend a big chunk of it in Korea. It’s a new issue of ADRs that will list in the U.S. and will fund Korean capex. SK Hynix’s Nasdaq ADR is a primary new-share deal: $29bn or so. Not an ownership reshuffle where U.S. money buys an ADR and the float just changes hands. It is fresh USD equity proceeds to fund won-denominated capex — Yongin Y1, the Cheongju packaging fab, domestic labor and concrete. That is a giant USD receivable with a KRW use of funds. FX traders will argue about timing, hedging, swaps, settlement, etc., but the first-order sign is: this is a dollar-selling / won-buying event.

The bookbuild starts July 6, the ADR is expected to trade July 10, and payment is scheduled for July 14. That puts the sweet spot for the trade almost inside the next two weeks. There is some risk of month-end weirdness in KRW, but you either put your stop far enough that to weather it, or you do the option. Even if only a fraction of the headline $29B-ish proceeds gets converted, it is a material flow in USDKRW. It also comes at a time when Korean officials are already telling the market that the won is too weak versus fundamentals. A large private-sector flow lines up with the policy preference and I can’t see any reason why Hynix would keep a ton of USD on its balance sheet when the spending is mostly in KRW.

Some investors may sell Hynix in Seoul and buy the ADR in New York, which would create the opposite flow. And some of the money might go to euros to pay ASML for tools. But for a two-week window, the risk/reward looks good, and I think you could expect something in the neighborhood of ten yards of USDKRW LHS over the next few weeks. Big primary USD raise, Korean capex use of proceeds, official discomfort with KRW weakness, and a very specific calendar. First target is 1503.

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Calendar

Here is the weird calendar as Friday is July 4^th sub-in holiday and so we get NFP Thursday and then an early close.

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Final Thoughts

1. If you are a young finance person looking for an internship, Jon Turek is advertising one here. You could not work for a better mentor. Jon is the best.
2. Crowded Market Report shows short SOFR, long DXY, short GBP, short CHF. He’s a good follow on Twitter.

Have an outside the box week.

Hi. Welcome to this week’s report. (To read about how I use and trade this report, see here.) The USD positioning score has now hit +5, and that is the level at which we most often see a turnaround. Most crowded are CHF, GBP, NZD, and CAD. Lotta big strikes at 1.1400 this week.

good luck ⇅ be nimble