Weekly Investment View: Adding to Long USD, Keeping Low Beta to EM

This Week

Bilal adds to our bullish USD stance by going short EUR/USD; Dominique expects the ECI release to be consistent with a March Fed cut; Caroline thinks the EU summit could prompt further forint weakness; Mirza covers China’s latest support measures and reviews our short USD/TWD trade; Henry expects BoE dovishness to build on Thursday and is watching EZ CPI for an entry point to pay 2Y EUR swaps vs 2Y GBP; Ben previews the Riksbank meeting on Thursday, where language will be key; Viresh argues Brent is transitioning to a higher range around $85/bb, but the rally will pause near term, John thinks if any of the ‘Magnificent Seven’ report weak earnings this week, it will be an opportunity to add to positions.

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Table 1: Current Trades
*Total returns using daily close price. Positions are sized such that impact of any one trade on portfolio is no larger than 50 bps.
Asset Class	Date entered	Trade	Rationale	Entry	Stop Loss	Target	Current Price	P&L*
FX	30-Jan-24	Short EUR/USD	Click here	1.083	1.095	1.055	1.083	0.0%
	24-Jan-24	Short 3m USD/TWD NDF	Click here	31.000	31.500	30.000	30.824	0.6%
	24-Jan-24	Short GBP/USD	Click here	1.276	1.290	1.235	1.264	0.9%
	24-Jan-24	Long EUR/CHF	Click here	0.943	0.925	0.970	0.935	-0.8%
	15-Jan-24	Short AUD/CAD	Click here	0.894	0.899	0.870	0.884	1.0%
	15-Jan-24	Long EUR/PLN	Click here	4.360	4.295	4.480	4.358	0.0%
	09-Jan-24	Sell 3m PHP/IDR	Click here	279.00	285.000	265.00	280.344	0.5%
	06-Dec-23	Long 6M 32.0 EUR/TRY Digital Put	Click here	31.350		< 32.00	32.911	-0.2%
	10-Oct-23	Long EUR/CZK	Click here	24.650	24.000	25.600	24.813	0.2%
Rates	26-Jan-24	Long June-24 SOFR Call Spread	Click here
	17-Jan-24	Long Sept-24 3m SONIA	Click here	95.550	95.400	95.950	95.595	6 bps
	11-Jan-24	Long 10y Spain vs BTP and Bund	Click here	30 bps	36 bps	12 bps	31 bps	-1 bps
	11-Jan-24	Pay Apr-24 ECB ESTR	Click here	3.60%	0.000	3.90%	3.679%	7 bps
	08-Jan-24	5y10y MXN TIIE Steepener	Click here	-10 bps	-30 bps	40 bps	-3 bps	7 bps
	05-Jan-24	Receive 10y SOFR Swap Spread	Click here	-39 bps	-30 bps	-60 bps	-37 bps	-2 bps
	04-Jan-24	Long Mar24 SOFR Call Spread	Click here	3 bps	0.000	22 bps	3 bps	0 bps
	20-Nov-23	Receive BRL DI F27 (from F25)	Click here	10.45%	10.50%	9.00%	9.87%	60 bps
	17-Nov-23	Long 1y1y vs 2y3y SOFR	Click here	-40 bps	-45 bps	0 bps	-13 bps	27 bps
	28-Sep-23	US 5s10s Steepener	Click here	-7 bps	0.000	15 bps	8 bps	15 bps
Comm	30-Jan-24	Long Gold		2033.4	1990.0	2180.0	2032.6	0.0%
Source: Macro Hive

Bilal Hafeez – Global Macro

We have been bullish on the dollar since the start of the year, building a long USD position in our model portfolio. Last week, we added a short GBP/USD, and now we like to add a short EUR/USD trade. We have three reasons for this:

1. EUR/USD has been in a range for the past year. We tested the top at the end of 2023 and now we are likely heading to the bottom of the range (1.055).
2. US growth is doing well. US data surprises are picking up, while Euro-area data surprises are peaking.
3. Oil prices are on the rise, which typically hurts the euro (Chart 1).

Dominique Dwor-Frecaut – US Macro

This is a data-rich week. Besides the Fed, I think the two most important data releases are the ECI and NFP. The ECI is the Fed’s preferred measure of wage inflation because it keeps the composition of employment fixed. The consensus for 1% QoQ is consistent with the Atlanta Fed median wage (the two series tend to track) and with the Fed cutting in March.

The other key data is the NFP, where I broadly agree with the consensus. Some market participants and policymakers are concerned the labour market is breaking. For instance, former KC Fed President Esther George – once one of the more hawkish FOMC members – is concerned by the decline in the hire rate.

Yet the decline in the hire rate matches a decline in the separation rate (Chart 2). That is, labour market flows have been falling, which is consistent with households getting stuck in their current homes because of the difference between their existing and market mortgage rates. I will investigate this in my review of Friday’s NFPs.

Mirza Baig – Emerging Markets

China has announced more support measures. These include further relaxing home purchase rules and increasing limits on stock lending (short selling). However, Chinese stocks are down this week as investors recognize the absence of a fundamental pivot on reforms.

We still prefer a low beta to EM as strong US data could extend a rise in Treasury yields. However, we went short USDTWD this week, where the export outlook is buoyed by Taiwan’s unique role as a dominant supplier of AI-related hardware.

Caroline Grady – Emerging Markets

Whether Hungary votes in favour of the EU’s €50bn Ukraine package at the 1 February EU summit will be hugely important for its standing within Europe. Orban’s December veto went against his track record of U-turns when EU funding was on the line. The unfreezing of €10bn in recovery funding for Hungary just a few days earlier was assumed to be the sweetener to get Hungary to vote in line.

An alternate plan where the remaining EU members provide national guarantees to secure Ukraine funding has been discussed for some time. But the EU would prefer a unanimous approach. A potential Article 7 procedure to suspend Hungary’s EU voting rights is increasingly being discussed should Orban continue to veto. But Slovakia could well side with Hungary.

Negative headlines from the summit will see further forint weakness and reduce the already low likelihood of the remaining recovery funding being released.

Henry Occleston – Eurozone & UK Macro

The BoE will announce policy on Thursday and update its monetary policy report (MPR) forecasts. I expect they will vote to keep rates unchanged, but it will be interesting to see how dovish the tone shifts on the updated forecasts.

In the vote I expect the hawks to shift more towards a pause, with potentially Mann (arch hawk) left as the sole vote for a hike. I expect Dhingra will be the sole vote for a cut, while the internal voters will remain rallied around a pause.

In the monetary policy report (MPR) forecasts, wage expectations and inflation will need to be revised downwards in the near term on the back of recent misses. It should be hard for Bailey to push back on market pricing when inflation looks likely to touch 2.0% before the summer (Chart 3).

The medium-term inflation forecast will be supported by lower market pricing for cuts (200bp over next two years). Hawkish assumptions on unemployment should also support it, probably allowing the wage growth assumptions to remain hawkish.

I expect we will only get the more serious dovish tone (and rates cut) at the May MPR, once we have the corrected labour market data (scheduled for 5 February).

For now, we still see value being long SONIA futures, positioning for a May cut.

Eurozone preliminary January inflation (Thursday) could be very volatile given index reweighting, and the end of energy subsidies. The market is looking for +2.7% headline and +3.2% core. My lean is to the downside on this (+2.6% and +3.0%), but my conviction is low given the volatility.

The question is whether, even if the actual data undershoots ECB projections (as I expect), it is sufficient to divert from their apparent current plan to cut in June. At this stage, I expect not.

Paying 2Y EUR swap against 2Y GBP looks attractive – this week could provide a good entry point if EZ inflation surprises to the downside.

Ben Ford – $-Bloc & Scandies

The ETS index has jumped to 90.5 (its highest since September 2022) from a revised 84.7 (the lowest since July 2020; Chart 4). Alone, it indicates a positive YoY outturn for Sweden’s economy in Q2 2024. The details show manufacturing is more confident due to international new orders and consumers buoyed by the potential for rate cuts. However, we think it is unlikely to impact the Riksbank’s decision on Thursday.

In their first meeting of the new eight meeting system – where no new forecasts will be produced ­– language will key. We already know a lot. Thedeen, Breman, and Jansson have publicly expressed happiness with SEK strength and core inflation progress, alongside taking away the need to hike again. While they may discuss cuts, we think the risk is small. Instead, we think it will be Jansson that makes the first claim of that kind – possibly around the next CPI outturn when there are two internal Riksbank meetings.

Viresh Kanabar – Commodities

Last week was positive for Brent, rising over 8% to $83.3/bbl. However, we think this week will be harder for two reasons:

1. US production disruptions have eased.

North Dakota production is now down c.50k b/d. This suggests production has returned far quicker than the one-month guidance pipeline authorities gave. Also, we could be seeing logistics-related tightness ease within the Dated Brent complex.

2. Russian vessels are unable to find a home in Asia.

Reuters reported 14 tankers carrying around 10mn barrels of Russian oil have been unable to find a buyer in Asia. This story has two potential implications.

First, Russia could be struggling to sell oil due to lower demand. We know there has been a supply overhang from Q4 last year, while several Asian economies including SK are seeing slower growth. Also, given the ongoing issues in the Red Sea, why would China or India not look to buy the oil now and rebuild inventories? Perhaps they see demand as too weak.

The second implication could be that Russian oil has become less competitive versus Saudi following the OSP drop and after accounting for the change in shipping costs.

Either explanation is bearish oil as it means demand is lower than supply for these barrels, forcing Russia to either lower prices or cut supply. It will likely be the former. When shipping costs rise, no one wins – this includes Russia and China.

Brent is transitioning to a higher range around $85/bbl. However, we think the rally will pause over the coming two weeks.

John Tierney – US Equities

We see little sign the year-long slump in the industrial sector will lift in coming months. Commodity tech companies, rail companies and materials suppliers mostly report tepid demand for their products.

This is consistent with the ISM PMI for manufacturing trading below 50 for the past year, and with 2024 GDP growth in the 1.5-2% range (Chart 6).

One bright spot is consumer staples, where major companies are reporting robust outlooks on rising prices and volumes. Tech companies plugged into the AI ecosystem are also optimistic.

The focus this week will be on five of the Magnificent Seven that report this week, including Alphabet, Amazon, Apple, Meta, and Microsoft. Other key bellwethers are General Motors, United Parcel Service, Advanced Micro Devices, and Qualcomm. Should any of the Magnificent Seven stumble, it will probably represent an opportunity to add to positions.

(The commentary contained in the above article does not constitute an offer, 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.)