Prime Trade Ideas: Trading Weakness in Asia FX

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.

An Update on Our Latest Trade Ideas

We summarise the latest updates on our trade ideas here with links to the original analysis.

• John left his US equity ETF biases unchanged. However, in the process, he has strongly reiterated being underweight equities, homebuilders, and consumer staples, and overweight energy.
• Our biases in Asia are playing out, but, in our latest update, we made two adjustments: we turned bearish KRW and neutral SGD. We retained our bearish CNH, INR, and TWD biases.
• Lastly, we are marginally bearish bitcoin and bearish ethereum over the next two to four weeks.

Bilal’s Asset Allocation Update

Find Bilal’s latest asset allocation biases here.

• When positioning for what is to come, patience is key. Markets are in a flurry post Jackson Hole, and the prospect of larger rate hikes for longer is weighing on assets across the board.
• Consequently, preservation of capital is essential so overweighting cash is a prudent strategy.
• On other assets, we remain underweight on government bonds. This should be no surprise; we think the market is underpricing Fed hikes. Should they hike the Federal Funds rate to 8%, as Dominique envisions, a recession would almost certainly ensue in 2023, and equities would face further declines. Therefore, we also remain underweight equities.
• Turning to the final two assets, the energy crisis is still playing out and supply-chain problems persist; we remain neutral commodities. We are also neutral crypto.

John Tierney’s US Equity ETF Biases

Find John’s full list of ETF biases here. Alternatively, they are in the table below.

• John left his US equity ETF biases unchanged. However, In the process, he has strongly reiterated several previous recommendations:
  • Underweight equities: We believe the economy will slow and could eventually fall into a recession due to the pressure of rising rates. As a result, corporate earnings are facing increasing pressure. It means H2 could see a renewed downward leg of the bear market.
  • Overweight energy: Of all sectors, energy represents the best value. Indeed, over the past six weeks, analysts have upgraded their earnings projection for the XLE ETF by a massive 8%! So, even though XLE has rallied 21% since mid-July, it is significantly undervalued relative to its current and projected earnings.
  • Underweight homebuilders: A sharp slowdown in housing activity is due to depress earnings in 2H. However, underlying housing supply-demand dynamics are strong. John, therefore, views this as a tactical underweight and will look to upgrade this sector as housing stabilises.
  • Underweight consumer staples: A contrarian position for a slowing economy – it is a lower-beta sector and generally does well in a declining market. However, John thinks it is rich relative to projected earnings and recent free cashflow generation. Moreover, the recent earnings season revealed an underlying inflation-based fragility.

Henry’s European ETF Biases

Henry made this call back in March. The premise still holds, and we review short-term adjustments periodically.

• Long-term overweight renewable energy (FAN, INRG): The EU remains hugely exposed to Russian energy – not just in gas but nearly all fossil fuels. It means that simply replacing the supply of Russian gas energy with other sources may be practically difficult (due to infrastructure) as well as geopolitically unattractive. Longer term, a concerted increase in renewables spend is highly likely.
• Paring overweight financials exposure. European stocks have faced substantial volatility as of late, from Russian gas supply, ECB policy, and Italian politics. It has meant we have pared exposure to the financial sector. Long term, however, we see strategic value in overweighting financials (CB5).

Cryptocurrency Models

Find our latest bitcoin signals here and our latest ethereum signals here.

• We are marginally bearish bitcoin over the next two to four weeks. The macro backdrop remains difficult, while the on-chain/flow metrics are yet to provide a supportive enough environment for a sustained move higher.
• We are bearish ethereum over the next two to four weeks for the same reasons as for bitcoin.

Discretionary Macro

Our latest discretionary macro biases in collaboration with SGX can be found here while our latest views on rates in collaboration with TMX can be found here.

• In our latest SGX Asia Currencies Insights update, we hold onto our bearish CNH, INR, and TWD biases. We have also re-initiated our bearish KRW view given sharply worsening trade accounts and apparent intervention fatigue by Korean authorities. Lastly, we turn neutral SGD (we were bullish).
• In our latest TMX piece, we are bullish Canadian rates (two- and 10-year) and bearish US rates (two- and 10-year). This is because we think the Fed will end up hiking more than the Bank of Canada, an opposing view to the market, while Canadian housing is more vulnerable than US housing.

Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.