Macro FX trading Q1 2023 commentary
| Instruments traded | FX spot |
| Asset classes | FX |
| Investment style | Discretionary (non-systematic), macro analysis |
| YTD return | -6% ( net of trading costs, service fee and performance fee - considering a performance fee for investing since inception but, since your performance fee will depend on your point of entry, your net returns will vary too). |
| Annualised volatility | 19% |
| Average trades per week | 12 |
Market overview
The strategy underperformed over the course of Q1 2023 with a long cross pair EUR/CHF and long JPY positions in February contributing most to the underperformance. On the plus side, a short AUD/CHF position contributed most to positive performance.
Q1 2023 saw a lot of volatility of economic data, geopolitics, energy markets and interest rate markets but less so for FX. In FX volatility was more subdued, the USD currency depreciating against the EUR, GBP, CHF and CAD over the quarter and appreciating against the AUD, NOK, and JPY.
Some market stress arrived when Silicon Valley Bank (SIVB) exited a loss making bond position revealing an appallingly managed balance sheet that led to its almost immediate demise. After deposits at SIVB were guaranteed in full, a programme to backstop bank liquidity (BTFP) was introduced and Credit Suisse merged with UBS so markets were not so volatile in the aftermath.
The USD currency was strong during Q1 2023 including during the Silicon Valley Bank and Credit Suisse events remaining still a safe haven for investors.
GBP/USD cross pair rate fell in February as the Bank of England seemed less enthusiastic about higher rates, however recovered towards the end of the quarter. The most volatile FX cross was USD/JPY on the back of speculation about when the Bank of Japan might end its extreme expansive yield curve control policy. Markets speculated that there would be a tightening of policy prompting higher Japanese Government Bond yields and JPY levels, however, no change was made at the January meeting.
Strategy performance (net of fees)
| Since inception (February 2015): | 180% |
Best-performing positions
| AUD/CHF | 1.34% |
| USD/JPY | 1.26% |
| USD/SGD | 0.51% |
| GBP/AUD | 0.27% |
| AUD/CAD | 0.16% |
Worst-performing positions
| EUR/CHF | -2.10% |
| EUR/USD | -1.70% |
| EUR/JPY | -1.06% |
| AUD/USD | -1.00% |
| AUD/JPY | -0.90% |
Outlook
Markets cast an uncertain eye over the Q2 landscape and beyond as policymakers face dual risks of keeping interest rates too high (for fragile financial stability and tightening credit conditions) or setting interest rates too low (against elevated core inflation amidst tight labour markets).
As central banks navigate financial stability challenges, their actions will be driven by economic data with a focus on employment and inflation. The Fed is indicating towards prioritizing the fight against inflation as do the ECB and Bank of England.
Bank of Japan governor Ueda took over from Kuroda on April 8th and signaled continuity for the extremely loose policy of Yield Curve Control (50bp 10 year JGB) and there are speculations about the next actions coming from him regarding changing this policy.
The strategy monitors the path of data, policy announcements and their impact on yield curves alongside the performance of asset markets in response to gauge moves in pro-cyclical and commodity currencies with particular importance placed on the path of the USD currency.