Macro FX trading Q4 2020 commentary

Market overview

Markets were driven by a multitude of key events  in Q4 2020:  the resurgence of high Covid 19 caseloads accelerating throughout the quarter, the US elections on 3rd November, successful conclusions of multiple Covid 19 vaccine trials and the path of Brexit negotiations to avoid ‘no deal’ and tariffs. Uncertainty and high implied risk volatility prices characterized the period leading up to said events with falls strongly contributing to positive risk flows in the aftermath. 

Strategy performance (net of all fees*)

*Performance net of all fees represents the performance after all costs including transaction costs, product costs, the 0.5% annual service fee and the 20% performance fee on profits above the high water mark. The performance fee presented in this document assumes the investor has been invested since inception. Therefore, your performance fee is likely to differ, as you will only be charged we you make profit on your investment, above your high water mark.

**The estimated performance fee due for the quarter is deducted from December performance number, meaning the month’s performance would be greater without this performance fee incurred. In practice, your performance fee is deducted from your account in the first few days of the new quarter.

The strategy gained 12.8% during Q4 2020.  The book made positive returns on short USD, long AUD, NOK AND CHF positions early in October before switching to a short EUR-JPY position at the end of the month as uncertainties relating to the diminishing chance of more Covid stimulus, the result of the election and the potential conduct of President Trump after repeated claims he might contest the outcome on the grounds of perceived irregularities. 

A combination of a Biden victory, calm elections and positive vaccine news led to a pronounced November risk rally with strong participation from commodities and steeper yield curves as risks of contest receded and with the possibility of a Democratic senate control. 

In the aftermath the book made further gains on short USD positions against NOK, NZD as well as GBP and CHF and concluded the quarter with further gains on new long AUD-USD positions in December. 

Best-performing positions

Worst-performing positions

Outlook

2021 has made a dramatic start to the year. The US Senate goes to the Democrats allowing decisive action on Fiscal Stimulus albeit with a razor thin majority which can temper extremities. The US rate market is stirring as it eyes the prospect of touted 2000 USD stimulus cheques (for households already long of excess savings) and anything up to 2 trillion USD more for a new Covid Relief Package. 

Long dated US interest rates are rising, with the 10 year rate breaching 1.10 and the 30 year closing in on 2 pct.  US Fed comments have flipped too with hints of Taper (of QE purchases) as early as 2021 when only last month the talk was of Fed capping yields to add more stimulus.  The Senate outcome is a potentially seismic event for Bonds and Rates and likewise various commodities (Copper, Silver) likely to feature in Bidens Green Deal. Key for the USD will be the extent to which rates are driven by rising inflation expectations vs potential Fed tightening of financial conditions. 

A reflationary environment favors a weaker USD, whereas Fed tightening favors a stronger USD and thus far the strategy manager which sees elements of both, keeps a very close eye on the interaction between 10 year nominal yields, inflation break-evens and real yields. The market starts the year consensus short USD, a factor potentially pertinent to other higher risk assets such as Emerging Market bonds and FX so their performance is also on the radar for possible feedback loops into developed market FX.  

The path of the virus is also a significant factor for markets. The UK has experienced a new aggressively contagious strain making for higher caseloads, harder, longer and economically costly lockdowns. The new variant is surfacing in various other countries. On the brighter side the UK caseloads may look to be peaking at the same time as the vaccine rollout makes good progress.  A hard Brexit was averted albeit with the skinniest of deals sidelining financial services amongst others.  Europe is lagging on the vaccine front, particularly France, which might translate into a longer and more costly lockdown.