2023.02.27 Weekly Notes

The Dollar Blackhole

11 min readFeb 27


The all consuming Dollar

Some thoughts on the USD which is beginning to behave like a blackhole where everything else gravitates toward to its untimely end and why I think this is just the beginning of a long road ahead for broad risk.

In case you’re not aware, there is a concept/theory called the “Dollar Smile” where you see USD appreciation when 1) there is a global slowdown/recession, or worse, is in crisis and 2) when the US economy is more robust than other major economies.

Usually its one of the other but I think we have an environment where we have both — US economic resilience is unmatched by other economies (especially non-US countries having largely variable interest-rate systems, whereas US is in mostly fixed rate mortgages for example) and, the world is facing a global slowdown as through the effects of monetary tightening as well as lingering geopolitical ‘cold-war’ risks.

Further, US resilience has widened the divergence in interest rates vs Japan and Europe, and with interest rates essentially being the price of money, it illustrates that there is simply no where to hide but in the USD given the current global macro outlook.



  • US stocks record worst weekly loss in 2 months on inflation fears — S&P 500 declines 2.7% over the week following run of hot economic data (FT). A One-Way Market Foils Stock Pickers as Fed Trounces Everything — Repricing of expectations for rates overshadows other factors, Growth, value stocks moving in lockstep by most since 2005 (BBG). Warnings of a Stock Market Bubble Finally Prove Too Much for S&P 500 — The PEG model points to an extended market with few precedents, The danger: Growth is at risk while valuation pressure builds (BBG). Morgan Stanley Says S&P 500 Could Drop 26% in Months — Risk-reward for stocks is extremely poor amid hawkish Fed: MS, Strategist says S&P 500 to slide as much as 26% in first half (BBG). The Stock Market Doesn’t Look Cheap — Any Way You Slice It (Barrons). Investors Are Bracing for Surge in Market Volatility — Bets on a rise in Wall Street’s fear gauge swell to most since March 2020 (WSJ). Bank of America Says Options-Driven ‘Volmageddon 2.0’ Warning Is Overblown (BBG).
  • Bets on the Year of the Bond Are Still on Even as Losses Return — Inflation, strong growth cause bond-market reset in February, While year’s gains erased, longer-term outlook seen supportive (BBG). Dollar gains as higher-for-longer U.S. rate views drive currency markets (RTS). Gold Slides as Hotter US Inflation Keeps Hawkish Fed on Track — Bullion slips the most since mid-August as dollar, yields jump, A 75-basis point rate hike “done deal” for September (BBG). Emerging Markets Will Have to Weather Another Dollar Hurrah (BBG). Developing countries’ debts mount as pandemic and strong dollar hit finances — Institute of International Finance reports debt burdens for large low- and middle-income countries are at record highs(FT).
  • Oil Breaks Six-Day Skid as Technical Measure Points to Rebound — WTI futures rise above $75 after 2023’s longest losing streak, US crude stockpiles increase to highest since May 2021 (BBG). Oil Stagnates as US Supplies Swell, Demand Rebound Underwhelms — Diesel slips to its lowest price since early in 2021, WTI crude futures hold steady after last week’s decline (BBG). Russia Sold Oil Far Above Price Cap, Researchers Say — Prices averaged $74 a barrel in first weeks after price cap, Authors advise stricter enforcement of oil sanctions (BBG). War in Ukraine Drives New Surge of U.S. Oil Exports to Europe — With the West mostly shunning Russia’s oil and gas, U.S. crude exports increase (WSJ). Europe Draws More Angolan Crude as Russia Ban Redirects Flows — Angola’s westward shipments have nearly doubled year-on-year, China’s Angolan imports wither as nation snaps up Russian oil (BBG).


  • Federal Reserve’s favoured inflation gauge accelerated in January — Market increases bets for a half-point rise in interest rates at central bank’s March meeting (FT). Fed Minutes Show Most Officials Favored Quarter-Point Rate Rise (WSJ). Goldman Sees Fed Hiking by Further 75 Points on Stronger Growth (BBG).
  • Economy Showing Strength in Early 2023 After Last Quarter’s GDP Gain Revised Modestly Lower — Output expanded at 2.7% rate in final quarter of 2022 (WSJ). Inflation Firmed, Consumer Spending Jumped in January — Data could lead Federal Reserve to raise interest rates for longer (WSJ). US New-Home Sales Climb to Highest Level in Almost a Year — Contract signings jumped 7.2% to an annualized rate of 670,000, Sales in US South increased 17.1% to highest in nearly a year (BBG). Behind the Housing Numbers: Mortgage Rates Are What Count — Housing market data released this month showed hopeful signs of buyer demand picking up ahead of the normally busy spring season. Then mortgage rates rose (Barrons).
  • Jobless Claims Edged Lower Last Week (WSJ). US companies say it is easier to hire despite low jobless rate (FT). Burned Out, More Americans Are Turning to Part-Time Jobs — The number of people working part time rose by 1.2 million in December and January — most were people who chose it. ’25 hours is the new 35’ (WSJ). Do Layoffs Pay Off? Meta, Amazon, Other Tech Stocks Paint a Mixed Picture — Stocks typically get a boost in the trading session immediately after layoff announcements but cuts don’t guarantee lasting gains (Barrons).


  • BofA and JPMorgan Say European Rally Will Fizzle Out Soon — Stoxx 600’s downside risks are mounting after surge: survey, Strategists see monetary tightening hitting stocks with a lag (BBG). Bad News Isn’t Over for Europe Earnings, Bernstein Strategists Say — European profit estimate cuts are only halfway done: Bernstein, Fourth-quarter results season was surprisingly positive (BBG). Recession fears return after German economy shrank 0.4% in fourth quarter (FT).
  • Britain and the EU aim to seal Brexit deal on Monday — Sunak and von der Leyen will meet to finalise agreement to overhaul Northern Ireland’s trading regime (FT). UK Firms Plan More Hiring and Price Rises Despite Recession — Major survey raises fresh concerns about persistent inflation, Boston Consulting says businesses upbeat about outlook (BBG). UK consumer confidence hits highest level since April 2022 — Forecast-beating rebound points to household resilience despite cost of living crisis (FT). Economists forecast smaller fall in UK output in 2023 — Falling energy prices and improved business and consumer sentiment offer brighter prospects (FT).
  • G20 meeting ends in discord as Russia and China refuse to condemn Ukraine war (FT). Putin casts war as a battle for Russia’s survival (RTS). US Offers $2 Billion in Weapons to Ukraine on One-Year Anniversary of War — The package includes systems to counter Russian attack drones, many of which come from Iran (WSJ). Western allies warn of ‘severe costs’ for countries helping Russia evade sanctions — US blacklists dozens of companies from countries including China, while EU and Japan prepare fresh curbs as war enters second year (FT). Moldova urges calm after Russian threat over breakaway region — Moscow alleges Ukraine is preparing to take over Transnistria, home of a large ammunition depot (FT).


  • Mistrust of Xi Endangers One of Wall Street’s Favorite Trades — The rally in China assets is stalling after quick easy gains, Now Xi must try to persuade long-term investors to trust him (BBG). China’s Upcoming Congress Spurs Optimism on Mainland Stocks — Investors say NPC meeting to deliver bigger windfall onshore (BBG). China’s Recovery Still Uneven With Industrial Sector Lagging — Services activities rebounded sharply after holiday ended, Home and car sales fell, while exports may continue to weaken (BBG). China Has a Debt Ceiling Problem of Its Own — By leaving local governments with the bulk of the debt, Beijing has failed to account for the fiscal damage done by Covid Zero and the property downturn (BBG). Flu Cases Surge in China, Leaving Antivirals in Short Supply — Country deals with influenza’s rise after Covid reopening, Empty drugstore shelves reminiscent of pandemic-era shortages (BBG). China Renaissance says its missing founder Bao Fan is [“]cooperating[“] with a government probe (CNBC).
  • Bank of Japan to Keep Easing, Kuroda Says as Term End Nears — Current price jump driven by costly imports to peak soon, Inflation expected to ease below 2% in middle of FY’23 (BBG). The New BOJ Governor Is ‘Team Transitory.’ Get Used To It — Kazuo Ueda avoided a market surprise. But in most other respects he’s sticking to his predecessor Haruhiko Kuroda’s thinking (BBG). Goldman Sees Modest Yen Weakness From US Rates Despite BOJ Bets (BBG). The Yen Regains Place as Most Attractive Bet to Fund Carry Trades — The currency’s yield has been little changed over past year, ‘Yen has no competitor now,’ (BBG). Funds trim yen shorts, currency volatility signals modest risk, Bond futures set to roll between Kuroda, Ueda meetings (BBG). Foreigners Cap Longest [6 week] Buying Streak in Japan Stocks Since 2019 (BBG).
  • Australia Recession Risk Rises as RBA Seen Hiking More Than Fed — Confidence tumbles Down Under as American sentiment resurgent, Australia’s variable rates see hikes hit mortgage-holders hard (BBG). Australian exporters rekindle China ties amid diplomatic thaw (RTS). Mad Cow Case in Brazil May Boost Australian Beef Sales to China — Trade relations between Australia and China continue to thaw, China has curbed imports from Australia for over two years (BBG). Australia PM Calls on Banks to Apply Rate Hikes to Deposits (BBG).
  • US, Asian Partners Discussed Supply Chains in ‘Chip 4’ Talks — Officials from the so-called Chip 4 grouping of the US, South Korea, Japan and Taiwan held a video conference on Feb. 16 to discuss an early warning system to ensure a steady chip supply, a Taiwanese official familiar with the talks said Sunday (BBG).


MSCI World equities have finally resolved lower after many weeks of showing distributive price action.

Developed vs Emerging markets ratio (rhs chart) has hit an area that was only surpassed when global liquidity with flush with easy policy, and given there is still much tightening to go, I expect weakness from the Developed markets to drag the ratio lower to further confirm the downturn in broad risk.

SPX and NDX looks to have confirmed a local top and trend change having tested the 3950 and 11900 support area last Friday. I don’t believe many would expect that to hold but seeing how those indexes have traded during last week’s sessions, I wouldn’t be surprised to see some squeezes along the way down, particularly into the last hours of trading sessions.

Looking at US sector performance so far this quarter, it would appear there is plenty of mean reversion room on relative basis…

and a view of stock breadth implies the same also.

Cyclically sensitive Dow Transports and Discretionary vs Staples ratio is pointing to further weakening, which often leads the way for broad risk.

What has me perplexed is the lack of bid in volatility premiums as bond volatility has been ratcheting back up this month. Downside premiums dropping substantially as equities sold off leads me to believe there has been some unwinding and distortions from shorter-dated options. Whether that is correct or not, the relative cheapness of put premiums makes me think equities could suffer from reflexive selling as demand for puts comes back. One to watch and will be looking for vol to get bid again to confirm downside bias.


Bloomberg commodities index continued to sink lower on the back of a stronger Dollar. Energy did look oversold and the bounce in Energy sub-index was largely driven by the ~30% rally in Natural Gas off the lows. While I am broadly bearish risk, I do think tactical longs will work well in the weeks ahead as a front running of draws on the huge inventory buildup and subdued refining activity to soften up further supply in the meantime.


2yr (Green), 5yr (Magenta), 10yrs (Yellow)

US2yr yields have made new highs with the last leg reacting to the strong PCE on Friday …

Curve is higher across the board last week …

and SOFR continuing to price out cuts for the 2nd half of 2023.


Bullish USD momentum remains in tact being the strongest on G8FX equal weighted basis, and from my experience, USD strength tends not to go away easily. Given the points I made earlier re USD smile, I don’t see any reason to justify the bearish USD trend to continue and would in fact argue that a bullish trend has begun.

JPY continues to trade to new low with the CHF beginning to show weakness as a result of USD pushing higher. EUR and GBP on index view is showing some resilience which seems to be a reflection of high-beta trades reversing as well as softening of extreme pessimism.

Of the high-beta commodity dollars, CAD strongest and attempting to gain some momentum (which it could do as Energy rebounds and being a kin of the USD), while AUD was the weakest last week.


  • Further to my USD bullish bias, a trade that I like and have made a few posts about on Twitter is AUDNZD short which is on the idea that the market has gotten relatively too hawkish/dovish and therefore too bullish/bearish on the respective currencies. Also given the rebound in Energy and resilient CAD data, I’m beginning to like long CAD ideas on the crosses.
  • I like tactical longs in Crude and Natgas and remain on the shortside of precious metals. US forward inflation expectations have been on the rise since the beginning of the year, and I think there is room for disappointment in precious metals as those expectations top out in reaction to more tightening being priced in to drag up real yields.
  • I like short Nasdaq being the most rich and sensitive to interest rates and strong performing European equity indices for a few tactical reasons — CTA long positioning is widely reported to be stretched while a weakening EUR is not conducive to lowering inflation and corporations maintaining healthy margins going forward.

Wish you good trading! Have a great week.