USD bears passed the test but…

USD bears passed the test yest

Starting to see a few short-term yellow/red flags here. I said that USD bears would face a test yesterday and we saw some strong USD buying from corporates, a USD-positive flurry from Bessent, a neutral but optimistic FOMC, and a negative EUR comment from Merz and we held in well. USD bears passed the test! We held in well because month end demand for currencies is strong. Pension funds are certainly not going to underhedge this month and some will probably overhedge if they have some small approvals from management.

• My inbox is stuffed with AUD vs. gold correlation emails.
• The sole silver ETF in China is trading 35% over NAV. This is reminiscent of the bad old days of crypto when GBTC traded massively over NAV because it was the only listed proxy available to trade bitcoin. It stayed in premium for ages, so this silver ETF story is not an instant signal that silver will top. But it’s a yellow flag. https://www.bitget.com/news/detail/12560605171157
• Every strategist in the world is raging USD bearish again. This is more like a yellow flag because this theme is so new. But I always get nervous when every newsletter, Substack, and Brent Donnelly of the world screams the same message from the rooftops. Here’s Gavekal’s latest, where they echo the reflationary sell USD theme. Gavekal are great! They have been around longer than I have and have a stellar reputation. I simply point out this piece because a) it captures the narrative very well and b) it’s a popular narrative.
• The AUD options market is now bid for calls for the first time since March 2009! While this is a red flag, it’s also worth noting that AUDUSD in March 2009 was right here (0.71) and it rallied to 1.10 by July 2011. But that was coming out of the Global Financial Crisis and into monster China stimulus and an accelerating commodity supercycle. So, the market was right in that case. Massively right. Is the current rally in metals and the current shortage of assets similar in importance to the recovery from the GFC? Probably not. Is it a big deal? Yes.

This Hedge America theme started with Trump’s Greenland threats and accelerated with the USDJPY rate check last Friday. It’s only two weeks old. Themes like this can persist for months. Still, I would rather shift to a more cautious mode here as there’s a decent chance that USD selling reaches a climax tomorrow around 11 a.m. as asset managers hedge their equity exposure for month end.

I have written extensively about how the month end models stopped working after COVID because pension funds got wise to the fact that executing billions upon billions of FX in a 5-minute window is suboptimal when most actors are in the same direction every month. But those flows still happen; they just get spread out and they get done earlier. So, we are seeing persistent demand for currencies now with the US corporates done buying their USD and FOMC out of the way.

My bet is the first week of February sees consolidation or a minor correction in precious metals and the USD as the turn of the month leads to some profit taking. The first week of February is a seasonally weak time of the year for precious, too. If you’re long precious metals, you can always sell 1-week calls against it. The vols are justifiably completely bonkers. I suppose you could say that 1-week silver vol at 100% is another yellow flag here as it’s peaked around 75/100 at all the major turning points in silver.

Here’s silver with red bars showing when 1-week vol went above 75.

Everything I see points to consolidation next week. Selling silver calls against longs and taking some profits in AUD into 0.7100 makes a ton of sense over the next 24 hours. See AUDUSD chart below. I don’t think 0.7110/60 will go quietly. By the way, I am off next week; just letting you know in case you don’t read am/FX tomorrow.

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Final Thoughts

1. META’s 125B of capex in 2026 is 0.42% of US GDP. That could be money well spent. I will keep an open mind but also, I will keep in mind that this is the same company that went all in on the metaverse and changed their company name to META at the peak of the metaverse fad and peak NASDAQ in October 2021. While that was clearly not a great decision, the company has done fine as its core business continues to pump out cash.
2. CHF TWI man oh man.

The “we’re going to control CHF strength” ship sailed January 15, 2015, though, I suppose. The Swiss don’t seem to have any appetite for a strong policy shift to counter CHF strength.

3. The plan is to sell the remaining AUDUSD from the 0.6920 call tomorrow at 11 a.m. or anywhere up near 0.7100. The epic levels are now 0.7110/60. I could see a buy rumor/sell fact trade through RBA at this point if we are anywhere near 0.7100. If I owned any AUD calls, I would be selling some 0.7150s to take profit by turning them into spreads.

Have a roller coaster day.

good luck ⇅ be nimble