Macro Dragon: Making Time for the Fed & Yield Curve Control (YCC)

Top of Mind…

• Folks, sometimes you reinvent the wheel, other times you use the wheels that others have created. All about the Fed over next 24hrs, would expect markets to be fairly quiet everything else being equal

• Do please make some time for our special YCC focus pieces, if you can only check out one, then listed to yesterday’s market call that had our CIO & Chief Economist, Jakobsen on:

• Macro/Cross-Assets + Saxo Markets Call: Yield Curve Control primer and tomorrow's FOMC

• Commodities: Yield-curve control could be gold’s best friend

• Currencies: FX Update: Eyeing the FOMC meeting and yield curve control

• Equities: What will yield-curve control mean for equities?

• KVP currently does not have a view on whether we get YCC today, yet think we can say with a high probability that it’s a question of when not IF… 

• …so perhaps there are a few assets such as Gold, EUR, JPY, CHF where there is not much downside if the Fed either delays YCC or/and is seen to be more hawkish than expected

• And argument can be made for them to slow their role, after all Nasdaq100 is at new highs, S&P is back in positive territory, activity in the US is suggesting that most states are opened, etc…

• Yet we saw what the ECB did last wk (unlike the RBA & BoC)… and we also know this Fed/Treasury has not been holding back… time & time again they have moved quicker & in greater magnitude than most people have expected…

• So if KVP had to be binary, it would likely skew on all-systems go…  

• Still any risk sell-offs & disappointments from the Fed are likely to be more technical corrections (we have run a lot, so some room for profit taking, let some steam out), rather than any structural reversal… so KVP would be looking to trade around that scenario as well

• AUD & NZD are obviously the standouts on G10 in regards to out-performance vs. the USD

• Lastly just sharing part of my dialogue in a chat with one of the best traders that KVP has ever come , it is all around potential price action on a more hawkish than expected Fed & focuses on currencies:

“On my side any reversal would be temporary at best in general across assets... yet agreed that its likely duration (Bonds) where the key risk is... UST's getting to north of 1% from these current 0.80%... Still, eventually Fed would come to the rescue...

On a more hawkish than expected Fed…

Think on FX: using DXY high of 20 Mar at 102.992, so -6.5% pullback since then (G10 beta)

EUR likely to be least effected, +6.03% since then & more importantly lot of strong tailwinds from EZ centric MP & FP… a la ECB & German Fiscal.. & German-France-Italy…

On that same note JPY & CHF are really only +3.0% & +3.6%, so potentially benefiting despite a likely stronger USD on a more hawkish than expected Fed

Likely AUD & NZD likely to be most affected.. those are up c. +20.53% & +14.56%... so plenty of room for healthy pullbacks… know quite a few folks waiting for repositioning into Aussie longs back at c. 66c lvls…

Note: Whilst NOK leads G10 pack with +26.34%, it was tied to also Oil going to negative rates... so harder to get cleaner feel there... not to mention Norway are likely the only ones in the world who are predominantly funding their fiscal package without any debt (i.e. selling EUR & USD assets out of their SWF)… anyhow KVP has screamed about this for a while now

On EM FX - tougher given, various localized dynamics (i.e. ZAR & TRY)... yet performance wise is interesting again here...

RUB, MXN at +18.2% & +13.4%... again no doubt good chunk tied to oil recovery...

IDR +16.0%

COP +12.8%

CLP +12.14%... copper recovery move?

Some standouts at the bottom:

TRY -0.61%

INR +0.60%

CNY +0.78%

TWD +1.9%”

-

On The Radar Today

• All about the Fed… nothing else matters on the known unknowns….

-

Start-End = Gratitude+Integrity+Vision. Create Luck. Process > Outcome. Sizing > Idea.


Namaste,

KVP