Macro FX trading – Q1 2019 commentary

Instruments traded
FX spot
Asset classesFX
Investment styleDiscretionary (non-systematic), macro analysis
Quarterly return+1.37% gross of service and performance fees, net of transaction costs
Quarterly daily return volatility0.95% 
Average trades per week12 (since inception)

Market overview

Q1 2019 was characterised by an aggressive rebound in oil and risk assets, reversing the Q4 decline. Prior concerns of the US-China trade war and tighter financial conditions were addressed by a thawing between Washington and Beijing as tariff escalation was postponed, and by a very dovish pivot by the US Fed and other central banks around the globe.  

Over two Fed meetings, Powell signaled no further rate hikes in 2019 (down from three) and a timeline for Quantitative Tightening to end. This caused an aggressive short gamma cover, resulting in a rate cut to be priced-in for 2019, and another in 2020. The 3-month to 10-year curve inversion gave talk to the US joining the rest of the world in moving towards recession. The ECB pushing 10-year bunds to a yield of -10 bp in part reflects the global nature of the central bank-inspired aggressive fall in interest rates. 

Participants took note of the easing conditions, with the implied volatility across asset classes falling, including FX which remained lacklustre and directionless. This is attributed to USD retaining an attractive carry verses other currencies; the DX Dollar Index essentially moving sideways during the quarter as data in Asia and Europe outpaced the US data to the downside; the EUR managing limited moves ending the quarter a point or so lower despite very weak data. The exception in developed markets was GBP which experienced sharp moves as the UK government fought among itself failing to push a Withdrawal Agreement through parliament. This resulted in an extension of the EU exit dead from March 29 to April 12. GBPUSD nonetheless ended the month some three points higher as a 'no deal' exit was voted down by parliament. 

Portfolio performance

Jan+6.2%
Feb–3.3%
Mar–1.4%
Q1 2019
+1.37%
1 year
 +12%
Since inception (5 Feb 2015)
 +155%

(Performance figures are net of transaction costs but before service and performance fees.)

The strategy gained 1.37pct over Q1 2019, making gains on a sharp downward move in EUR JPY positions during early January, to later give back some of those returns over the subsequent months on listless trading conditions and low delivered FX volatility.

Outlook

With German bunds yielding negatively and US rates already low for the late (economic) cycle, all eyes are on global data as Central Banks consider their tools for the cyclical downturn. So far, a rebound in Asia PMI lends support to the notion of near-term stabilisation and markets supported by underinvestment by participants. However, both are dependent on positive China-US trade talks and without shocks emanating from GBP and Brexit, which faces another deadline on 12 April and absolute uncertainty regarding the nature of resolution. The persistent bid to oil, while its lasts, can lend support to petro currencies but the key driver will be the performance of the USD and the EUR. This must be put into context, heading towards European parliamentary elections in May, adverse data, carry and politics. 

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