Brainstorms: Trading Central Banks
Brainstorms: Trading Central Banks
Leverage Trades
Hey everyone,
I want to start by saying thank you to every single one of you. This Substack (and the connected Twitter account) went public at the end of March. It has been just over three months, and it is blowing up! Interacting with you all has been an absolute pleasure.
Those of you who have been following me since the beginning know that my goal is to push myself to the limits of what is thought to be possible. I am not in the markets to be average. I consider myself an intellectual athlete who refuses to lose or quit. I will improve every single day and will never turn off that drive!
This Substack is designed to attract people who strive for the same level of excellence. Although this pursuit may look different for each of us, our mindset is the same. So, let me say this to you: never switch off that mindset!
Big Picture Items:
I have several important items to cover and then we will get into the alpha:
First, I did a comprehensive macro report going over macro flows, fixed income, and FX. This will be important for framing trades moving forward: Link
Second, I did an article on the dollar. You will notice most extreme narratives extrapolate minuscule data points to the entire economic system and imply the dollar is going to zero. While this makes headlines, it doesn’t make money: Link
Third, I did a Twitter space with Prometheus Research talking about macro mechanics and extracting returns through various macro regimes: Link
One thing I will say on this: I usually see people trying to get a single macro call or bear market right instead of creating a process to consistently extract returns over time. Always focus on building a consistent process. Prometheus is one of the best in the world at this.
Fourth, I did a couple of Twitter Spaces/Podcasts that you can find here:
Fifth, I provided a summary of some FX templates that I have set up in Tradingview and shared some broad thoughts on inflation:
One key thing to remember: The momentum and mean reversion of assets are connected to the level and rate of change in the GIP regime.
Finally, I have developed a referral option for Substack, granting free access to the research articles I write exclusively for paid subscribers. Check it out here: link
The Alpha:
Today we had an incredibly important event for global markets: All the major central bank governors did a panel. The interviewer was epic. She asked the best questions and it was quite funny.
What you really need to do is monitor all central bank speakers and how their rhetoric gets priced into their respective forward curves. I am going to focus on the US for this article.
Big picture, remember, the dot plot was revised UP at the most recent FOMC:
Powell has said TWICE that he expects two additional rate hikes. Here is the key though, the market is only pricing a high probability of one:
Why does this matter? Well if the market isn’t pricing a hike in September then that means there is likely additional downside for the short end of the curve. Given where we are in the inflation cycle, this means we are likely to see a further flattening in the yield curve.
Now there are two things I am thinking about in connection with this:
First, we don't have a meeting in August, which means there is a longer-than-normal lag between FOMC meetings. Therefore, it's possible that we might see a slight rally in bonds before the September rate hike gets priced in. However, big picture, I am not placing any leverage long bond trades on YET. I will be providing paid Subscribers with the actual execution signals when I go leveraged long on bonds, if you wish to follow that.
Second, we have PCE data coming this Friday, which will be key for bonds. Just remember, CPI, PPI, and PCE are the major inflation data points for bonds
This dynamic with bonds is part of the reason we have seen downside in gold and silver.
Keep in mind, these central bank decisions are directly connected to FX flows right now:
The final thing to note is that we are nearing levels in the Yen where the BoJ previously intervened in currency markets. If this happens again, there will likely be a long trade in the Yen and perhaps even a short on the Nikkei. This could reverberate across US bonds and potentially gold. This could turn out to be a really beneficial trade. If and when it happens, I will provide the trades I am executing for paid subscribers.
The Large Leverage Trade I have On:
Let’s shift to the leveraged trade I shared and other risk-reward setups I brought attention to: