Macro FX Trading Q1 2018 commentary
|Instruments traded||FX spot|
|Investment style||Discretionary (non-systematic), macro analysis|
|Quarterly return||-12.6% gross of service and performance fees, net of transaction costs)|
|Q1 2018 daily return volatility||0.95%|
|Average trades per week||10.6 (since inception)|
Whereas the fourth quarter 2017 experienced extremely low volatility (both delivered and implied) for risk assets, in the first quarter of 2018 the opposite transpired. In the aftermath of the US tax reform, the treasury embarked on a long-term programme of debt issuance. Rising US yields incurred as a result of this, as well as the unfolding of quantitative tightening, stronger US data, a more hawkish Powell at the 28 February testimony and increased growth and interest rate forecasts at the March FOMC. Furthermore, this was exacerbated by some 50 basis points, driven by technicals including the increased spread between Forward Rate Agreement (FRA) and Overnight Index Swap (OIS) spreads, putting upward pressure on Libors. Thus, the low volatility environment ended abruptly in early February as the VIX jumped and set the risk tone for the quarter.
On 1 March, President Trump announced intentions to pursue trade tariffs on multiple countries including China, and soon after North Korea suggested high level talks. The Italian election saw strong gains from populists but no outright winner, and the ECB released a more hawkish statement followed by a very dovish press conference. Tech companies took a big hit as questions arose about data protection, trade tensions escalated and the Fed Put perceived expired, all adding to volatility.
All of this meant that in January we saw a continuation of the USD selloff, with the Euro making strong gains on hawkish ECB minutes. Yen strength continued into March as risk-off ensued but the Euro moved sideways as data and long-dated rates fell sharply in Europe, including Spain and Italy, after an inconclusive Italian election. This enabled the CHF to follow peripheral spreads lower despite broader risk aversion. The GBP rallied in March after strong wage gains, positive Brexit developments and as the markets priced in rate hikes from May onwards.
The book suffered in the first quarter of 2018 from market events and decline in risk sentiment in March. After capitalising on a stronger EURUSD in January, losses were incurred from late February onwards as the FX market experienced very erratic yet ultimately sideways conditions, on the back of news headlines and events surrounding a more hawkish Fed, trade tariff announcements by the US, North Korean talks and mixed, contradictory messages from the ECB and BOJ.
|Q1 2018||Since inception (5 Feb 2015)|
The immediate outlook for FX is likely to be determined by the development of trade talks, as the deadline to implement the tariffs approaches in May. Alongside this is the path of risk assets led by Facebook, Amazon, Netflix and Alphabet (Tech-FANG), against the background of a new style Fed which is resolute on continued hikes. ECB policy confusion may or may not resolve at the June meeting, and for this the strategy manager remains open minded. The BOE meeting in May will be key for the GBP. The book has a small core long position in GBP and will watch developments unfold on trade and risk assets elsewhere.