Commodities | Equities | FX | Portfolio Updates | Rates
Prime Trade Ideas: Crypto and Currencies in Focus
- By Ben Ford
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- 3 min read
We consolidate our favourite biases into one, easy-to-read, weekly report! Please find the original pieces linked throughout and a summary table at the end of the document. Reach out to us on Slack or email the author with any questions about the content.
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We consolidate our favourite biases into one, easy-to-read, weekly report! Please find the original pieces linked throughout and a summary table at the end of the document. Reach out to us on Slack or email the author with any questions about the content.
Latest Updates
Asset Allocation
- 3 risks to the financial system in 2023 keep us overweight cash (4 April, Bilal Hafeez).
FX, Rates and Commodities
- Bearish DXY over the long term plus bullish EUR/USD and bearish GBP/USD (14 April, Richard Jones).
- Value in 2Y DM bonds (6 April, Richard Jones).
- Evaluating EM sensitivity to oil, we are bullish CNH, KRW and THB (5 April, Macro Hive x SGX).
- Oil to trade rangebound to slightly higher (3 April, Viresh Kanabar).
Equities and Credit
- Value in owning major banks (29 March, John Tierney)
Cryptocurrency
- Ethereum bullishness increases following Shanghai upgrade (11 April, Dalvir Mandara)
- Bullish bitcoin as big investors flood back (28 March, Dalvir Mandara)
Momentum Models
- Momentum models return net-bearish on US rates (13 April, Ben Ford)
And if you missed it, Dominique recently appeared on Bloomberg TV, giving her thoughts on the Fed outlook following the March CPI release. There has been a host of investment content on our podcast, too! Peter Spiller gave a masterclass on how he has delivered 15% annualised returns since 1982; Jim Leitner revealed how he has created a macro edge using options and carry trades; Geoff Rubin put forward his take on portfolio construction!
Bilal’s Asset Allocation
Find Bilal’s latest asset allocation biases here.
Not every smart portfolio decision requires a trade. Sometimes, just recognizing risks in a market can save you from devastating losses. Bilal recently acknowledged that while the banking crisis may be passing, the leveraged loan market, commercial real estate, and ESG all present risks to the financial system.
These risks are why we stick to our ‘everything breaks’ portfolio in our latest Asset Allocation, which means overweighting cash. We first outlined this in 2022, and it has held us in good stead. Indeed, after the Silicon Valley Bank (SVB) failure, there was a dash for cash. This reminds us that at times of market crisis, cash is king. And remarkably, even cash at an unsafe bank like SVB was ultimately protected by the US government. Our bias though is to park cash in T-Bills.
Given the large bond rally, the market appears to have priced a very dovish Fed. We disagree so like to stay underweight bonds, especially shorter tenors (e.g., 2-year). But the bank issues show that risk markets are vulnerable, so we like to return to being underweight equities.
Meanwhile, we turn neutral on commodities (from overweight) as heightening market volatility could impede a commodity rally. Although it has been trading well given the news, we stay neutral crypto as it remains a risk asset.
Finally, we still favour an overweight in cash – our favourite asset in a world transitioning from low rates to high rates.
FX, Rates and Commodities
G10 FX
What’s next for the dollar? You can read the entire piece here.
DXY has declined ~3.5% over the past six weeks or so, partly due to more dovish pricing of expectations for Fed monetary policy. Broader fears of a US-led recession have also prompted investors to question the basis of USD strength over the past two to three years.
We expect the recent ranges in the DXY and major USD pairs to hold in the coming weeks. Yet we expect more downside in the dollar after the Fed, ECB and BoE rate decisions next month. Specifically:
- EUR/USD: the downside (~1.05) of the recent range has been tested and held. The pair now trades back near the top of the 2023 price corridor. In the medium-to-longer term, expect further upside.
- USD/JPY: ~127/138 has contained trade in 2023, and this range will continue in the coming months.
- GBP/USD: the pound briefly fell below and rose above the earlier 2023 range of ~1.19-1.25, and now hovers near the top of the range. We remain bearish sterling longer term, preferring to fade any GBP strength.
- USD/CAD: the 2023 range has been ~1.3250-1.3860, and the pair currently trades just below the mid-point. Expect sideways trade in the pair in the coming months.
G10 Rates
What’s next for central banks and yields? You can read the entire piece here.
February and March saw outsized volatility in G10 interest rate markets, especially in the short ends of the curves. This has seen expectations for pricing central bank policies swing wildly, especially considering the turbulence in the US and European banking sectors.
Overall, the volatility has rendered central bank expectations considerably more dovish now than last month when at their most hawkish. That said, expectations have withdrawn from peak dovish levels a week or two ago when fears about the global banking sector were at their highest. Expect the wild volatility of February and (especially) March to abate in the coming weeks, with a return to the trough in yields seen in March more likely than a return to peak yields seen that same month.
EM FX
Our latest Asia currencies insights, in partnership with SGX. You can read the entire piece here.
Another month of weakness in March leaves Asia FX down through Q1 2023. The early April spike in oil prices following the surprise OPEC+ production cut has also weighed on Asian currencies. But compared with the pronounced declines in Asia FX in February as markets repriced expectations of Fed policy sharply higher, depreciation was moderate in March despite the US and European banking sector turmoil.
The rise in oil renews upward pressure on inflation at a time when Asia central banks are at, or near, the end of tightening cycles. It also comes as the latest PMI data across north Asia shows ongoing weakness in manufacturing and little boost yet to the rest of Asia from the China reopening. As oil importers, Asian currencies are mostly negatively correlated with oil prices, increasing near-term risks.
TWD is currently the most negatively correlated currency in Asia to oil prices (based on 3m changes) given its status as an oil importer and low yielder. CNH, THB and KRW are also negatively correlated, while the correlation for INR has swung positive. We turned more cautious on Asia FX in March with dollar strength and Asia’s low carry environment offsetting the near-term positives on the region from China reopening. We nevertheless remain bullish CNH and cautiously so on KRW. We also reinstate a bullish THB view. INR remains rangebound, and we stay neutral.
Commodities
Our latest update on oil. You can read the entire piece here.
OPEC+ announced further cuts in oil production of 1.2mn b/d from May until the end of the year. We see limited impact on actual supply as OPEC+ is already underproducing relative to their existing quota. OPEC+’s ‘precautionary cut’ confirms demand is undershooting their expectations so far in 2023. We still expect oil to be rangebound to slightly higher going forward.
Equities and Credit
Equities
Go long depressed banks. You can read the entire piece here.
The ongoing banking crisis has scrambled bank valuations and left our long financial and banking ETF trades deeply underwater. We think the banking sector will bounce back as the crisis recedes – although not to previous levels.
We retain long positions in regional banks (KRE) and insurance (KIE). We reverse a short position in the broad banking sector (KBWB) and add long KBWB versus short S&P 500. Lastly, we are going long several major banks, including Citigroup (C), JP Morgan Chase (JPM), Goldman Sachs (GS) and Morgan Stanley (MS).
Cryptocurrency
Turning more bullish on ethereum following the Shanghai upgrade. You can read the entire piece here.
The macro backdrop remains neutral-bearish for ethereum. The Fed are expected to hike once more in May following continued strong expansion in US nonfarm payrolls. As a result, the probability of a recession remains over 90%! Meanwhile, on-chain/flow signals are producing mostly bullish signals.
With the macro backdrop still slightly bearish and our on-chain/flow metrics very bullish, our overall signal is bullish ethereum.
Big investors flood back to bitcoin. You can read the entire piece here.
The picture is similar for bitcoin with on-chain/flows signals providing a strong backdrop for the cryptocurrency. With the macro backdrop still slightly bearish, and our on-chain/flow signals very bullish, our overall view is bullish bitcoin.
Momentum Models
Our momentum models cover FX, equities and rates. The basic strategy is to use returns (lookback windows) to give buy/sell signals. You can find the latest report here. Find out how to enhance your portfolio using momentum models here.
Momentum models delivered their first positive week of returns in three weeks, with a strong performance in FX outweighing negative returns in equities. Overall, returns remain far better in the FX carry strategies we follow. Bullish equity momentum models have returned while they have turned bearish in rates. Fewer changes were seen for FX momentum models but turned bullish on USD/JPY.