Prime Trade Ideas: King Dollar to Reign Supreme in Q4

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 

FX, Rates, and Commodities: 

• USD to lead the way Into Q4 (28 September, Richard Jones) 
• Oil spike could boost USD further, hurting risk assets  (29 September, Vasileios Gkionakis) 
• Buy FTSE 100 and short GBP on dovish BoE (26 September, Vasileios Gkionakis) 

• An opportunity to sell overbought CHF (20 September, John Floyd, Richard Jones) 
• HFs are extremely long BRL and MXN (August, Macro Hive, CME) 
• The market underestimates 2024 hikes (28 September, Dominique Dwor-Frecaut) 

Equities and Credit: 

• Equities look fully priced given Fed path (26 September, John Tierney) 

• Tech earnings will make or break S&P’s 2024 (27 September, John Tierney) 

Momentum Models: 

• UK yields to fall further (28 September, Bilal Hafeez) 

Asset Allocation: 

• An allocation to crypto could boost risk-adjusted returns (25 September, Dalvir Mandara) 

Bilal’s Asset Allocation 

Find Bilal’s latest asset allocation biases here. Read our latest piece on crypto’s impact on portfolio performance here. 

• Our views on the major asset classes remain the same. We’re slightly more positive on the FTSE 100 given this environment of rising rates at the long end. The UK market remains cheap and has the lowest sensitivity to higher rates. Also, the FTSE 100 is dominated by global firms, so the domestic weakness in the UK is unlikely to be a big headwind.  
• This month, we investigated what impact minor allocations (1% to 5%) in crypto would have on overall portfolio risk performance. 
• We found that an allocation to crypto would have boosted (risk adjusted) returns. Also, given crypto’s low correlation to other assets, it appears to be a good candidate for portfolio diversification and the growing number of cryptocurrency sectors (smart contract platforms, privacy coins, metaverse etc.) adds to the diversification effect.  

FX, Rates, and Commodities 

G10 FX 

USD to Lead the Way Into Q4 After Central Bank Deluge. You can read the entire piece here. 

September has been a busy month for G10 central banks, with FX price action swiftly reacting to the new global monetary policy landscape.  

We think FX markets are set for a lively Q4, with leaders and laggards emerging as most central banks near the end of their respective tightening cycles. 

Richard thinks the US dollar should continue its recent strong run into Q4, leading the G10 currencies in the coming weeks, while sterling remains his least favourite currency.  

USD Is on a Tear, But It Is Too Soon to Fade. You can read the entire piece here. 

The US Dollar Index (DXY) trades at a six-month high, having risen for eight straight weeks.  This rise has momentum and will probably continue into Q4. The combination of higher oil prices, rising 10Y yields and a stronger economy has brought forward the strength of the US relative to its peers. 

Richard thinks that there is material downside to come in GBP/USD (cable). Against the USD (and other G10 currencies), sterling is our favourite short.  We expect cable to revisit the year-to-date (YTD) low near 1.18 in Q4.   

Commodities 

Viresh believes the oil market is already pricing in a tight environment meaning it will be difficult for material upside above $95 on Brent. Typically, we see inventory draws of around 28mn barrels when demand exceeds supply globally by around 1mn b/d. Given oil’s fierce rally over recent months, and how extended speculative positioning has become, he has shifted his view to neutral. 

Macro Hive Collaborations 

Oil Prices Threaten to Wreak Havoc in Markets. You can read the entire piece here. 

Vaselios Gkionakis explores the impact of higher oil prices on various FX pairs. Oil’s rally has caused markets to react: equity prices are deeply in the red this month, while recent dollar betas to market factors show oil prices have jumped into the driver’s seat. 

This unsettling development threatens already anaemic global activity. If it continues, it will likely lead to further risk reduction, dollar upside and high beta FX (alongside EUR) underperforming NOK and CAD. 

Guest Article: The Risk of More Dovish BoE Re-Pricing. You can read the entire piece here. 

Vaselios Gkionakis explores the BoE decision to keep the base rate at 5.25%. He argues further dovish re-pricing is still likely because the labour market is looser than headline unemployment shows, and house price declines will weigh on household consumption. 

Consequently, wage growth may correct notably lower, inflation may fall faster, and the probability of UK recession may increase. 

If so, sterling will keep underperforming, short-term yields will come under pressure, and FTSE100 will outperform both global peers and the more domestically focused FTSE250. 

Guest Article: Et Tu, SNB?. You can read the entire piece here. 

John Floyd joins Richard Jones to explore the recent moves in the CHF and consider how the SNB’s actions could lead to downside from current levels.  

The upcoming Swiss National Bank (SNB) monetary policy meeting provided an ideal vantage point to consider future Swiss monetary policy as driven by both domestic and global influences and provides significant trading opportunities. 

Recent CHF strength may fade as an SNB monetary policy shift combines with opportunities to exploit currency factor return premia in carry, value, and momentum. 

Guest Article: Two Reasons Why the Dollar May Struggle for Direction. You can read the entire piece here. 

Vaselios Gkionakis looks at two historic USD drivers – Fed rate expectations and risk sentiment – and thinks they are unlikely to steer the broad USD (either way) in the next few months. 

He believes Oil prices continuing to rally (potentially higher than $120/barrel), squeezing consumer spending and precipitating a global recession and an equity bear market is a big risk to his shorter-term view. But absent this he believes the dollar may struggle to rise much further given its recent rally.  

Guest Article: Look for Idiosyncratic, Relative-Value and Carry Trades in FX. You can read the entire piece here. 

Vaselios Gkionakis explores idiosyncratic and some relative-value (RV) trades. He’s looking for increased mon-pol divergence via: Bank of England repricing lower, and rates re-pricing in CEE. 

He believes that carry should hold up well over the coming weeks, assuming global equities trade in a range. In such an environment, Sterling should underperform mainly the oil-linked currencies. MXN should continue its strong performance, especially against low yielders in Asia. In CEE, PLN is likely to lag. 

SGX: Central Bank US-China Economic Divergence. You can read the entire piece here. 

In our latest collaboration with SGX we look at how the pronounced divergence in US-China economic data has dominated Asia FX performance.   

August’s sharp rise in US real rates amid still-robust US economic data has meant ongoing strength in the broad dollar. Meanwhile, further property market stress in China, disappointing macro data and an underwhelming policy response saw USD/CNH spike. Our cautiously constructive view has not played out. We take a more neutral stance on Asian currencies. 

Equities and Credit 

Equities 

Our view on equities remains the same. We’re neutral on the S&P, while being underweight the homebuilders.  

2024 Earnings Priced for Perfection? You can read the entire piece here. 

Equities have been mired in a tight range since early summer as markets weigh the pressures of rising rates against ongoing evidence of a robust economy. 

Current projections for 2024 should support equities – earnings are expected to be up 11% for the S&P 500 and 33% for the NASDAQ 100. However, John doesn’t believe that the growing sentiment that the Fed could be headed towards a higher-for-longer rate regime is reflected.  

Why is this important? Equity investors pay close attention to earnings forecasts. If current projections are revised downward later this year or early next year, equities will remain in a trading range or fall to reflect an evolving reality. 

SPX Earnings Outlook Relies on Tech? You can read the entire piece here. 

The S&P 500 earnings have been little changed since early 2022 – but are projected to jump 11% in 2024. This top-level performance blurs considerable variation across sectors. Since early 2022, industrials and energy sectors have been stars while communications and financials have been notable laggards. 

John finds that the projected 2024 earnings growth relies heavily on the communications (Meta), consumer discretionary (Amazon), and technology (MSFT, NVDA) sectors.   

However, with the Federal Reserve (Fed) apparently nearing a higher-for-longer policy stance, current earnings projections across the market and especially the tech sector will surely be tested – with likely consequences for equity valuations. 

Credit 

There are no changes to our credit view since last month. 

Cryptocurrency 

There were no updates to our crypto views this month.  

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 signal lower UK yields. This aligns with Henry’s bias in the front-end of the curve. They also agree with our bearish US rates bias. In FX they align with our long EUR/CHF trade. 

Rates momentum models (+1.5% WoW) outperformed FX (+0.2% WoW) and equity momentum models (-0.8% WoW) over the past week. Rates momentum models are the best-performing models over a three-month time frame (+4.5%). FX (+0.1%) followed while equity (-2.6%) struggled. 

Momentum models are signalling lower UK yields but UK equity outperformance. In FX, they have begun to align with our long EUR/CHF trade.  

Central Bank Monitors and Previews 

Fed: 

The economy is set to experience four shocks in October: an auto strike, government shutdown, onset of student debt repayments, and the end of tax relief.  Of these, the auto strike could have the most impact and add upside risks to inflation. 

By contrast, a government shutdown, student debt repayments, and the end of tax relief, are likely to have only a short-term impact on the economy.   

Higher inflation risks mean the Federal Reserve (Fed) could hike more than it and the market expect. This is not a 2023 risk as inflation is likely to behave in line with the SEP forecast, but rather a 2024 risk. The two 2024 cuts the Fed expects are predicated on core PCE slowing to 2.6% by end-2024, from an expected 3.7% in 2023. If inflation proves stickier than the Fed expects, it is likely to remove the cuts and could actually restart gradual hikes around mid-year.  

ECB: 

Henry no longer expects the ECB to hike at their next meeting given the softer core inflation reading this morning. However the relief may be short lived as base effects from lower energy costs and continued wage pressures mean that the ECB still ultimately has to go to 4%.  

Viresh Kanabar has worked in the UK financial services industry for over 8 years including in Consulting and Investment Risk. Most recently he launched The Macro Journal Substack where he puts out regular in-depth reports covering all areas of global macro.

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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)