2025.06.23 Weekly

“Talks of the Dollar demise has been greatly exaggerated”

CORE RISK VIEW

Before diving into this week’s focal discussion, I begin by touching on my core view discussed in last week’s note as risk-aversion is beginning to creep into markets, as well as Oil prices reemerging as a major risk to the global economy. The “Top is in?” view is centred around 2 key points — 1) volatility becoming more elevated due to rising geopol uncertainty and 2) global macro data is starting to turn weaker.

1) Volatility becoming more elevated: Revisiting the Skewdex chart I noted earlier in the year (this time adding the Purple box and arrow, and 3-month moving average), we have since seen the range lows shifting higher. This indicates stronger demand for downside protection in US equities, as well as a reflection of the market’s expectation for higher volatility. In such an environment where positive asset returns become increasingly challenging, there is some reason to expect that it will persist when it looks unlikely Trump will finalise trade deals in a timely manner as we approach the July 9th (90-day pause) deadline. Perhaps the best-case, as far as trade deals go and as a risk to the elevated volatility view, is that some interim agreements or statements of intent or progress is made. The most likely scenario would seem to be for another extension, but I think this will only frustrate markets that have rallied on more optimistic outcomes. Trade war aside, the Iran war has emerged as the bigger risk that has sent oil prices soaring again, and the increasing global stagflationary risks should make the strengthen the case for elevated volatility.

2) Global macro data turning weaker: Looking at the above Citi Economic Surprise (equal-weighted) Index charts, I highlighted in the prior note that global data surprises had started to rollover; that has continued last week. Just as there reasons to expect high uncertainty/volatility to persist, there are good reasons to expect data surprises to continud coming in weaker as the impact of Trump’s trade policies begin filtering through to the data. That weakness is now likely to be and further compounded by soaring Oil prices. This graphic created by Brent Donnelly says it all…

GEOPOL RISKS & OIL PRICES

The Strait of Hormuz is a big deal. Just in last night, “The Iranian parliament has unanimously reached the decision to close the Strait of Hormuz. The final decision rests with the Supreme National Security Council and the Supreme Leader, Ayatollah Khamenei.” This comes after Iran has threatened possible attacks on commercial shipping with missile strikes and seizure of vessels. The Yemen-based Houthis have also made threats of disrupting shipping lanes with analysts speculating the use of easy-to-deploy sea mines.

Although they do not operate in the Strait of Hormuz, they can disrupt the Bab el-Mandeb Strait which could indirectly disrupt southbound Oil transport from the Suez Canal. Of the seven chokepoints for global seaborne oil transportation highlighted by the EIA above, the Strait of Hormuz represents 27% of total volumes, Bab el-Mandeb and Suez Canal makes up 22%, and those 3 collectively making up 49% of all Oil transported through the major chokepoints.

Not only does this impact Oil prices in general, the disruptions will impact the major Asian economies which make up 2/3rds of Oil transported through the Strait of Hormuz. With Asia being critical contributors to global supply chains, cost-push inflation risks will increase on top of that created by tariffs.

KING DOLLAH!

Now, for the focal point of today’s discussion; I challenge the widely discussed theme of a “major regime change” or “sell-America” trade that’s touted under the premise that the USD is ‘only just beginning’ its secular downtrend due to a loss of confidence and appeal in US-denominated assets, USD therefore losing its safe haven appeal, and thus leading to a long wave of portfolio rebalancing out of US assets and hedging against a USD decline en masse. How overly exaggerated, if not wrong that thesis may already turn out to be…

USD reasserting it’s safe haven status

First, the safe-haven argument; I’m surprised this was even in doubt but nevertheless, short-term correlations of Stocks vs US bonds and Dollar has turned sharply negative as risk aversion has creeped into stocks.

The momentum in USD selling is fizzling out as it is virtually unchanged over a prior 2-month window. The Purple lines below marks the April-21st USD low, where I would say the end of ‘sell-America/Dollars’ wave ended, and its simply been trading soft on residual momentum since.

As the charts stand, USD appears to be coiling up for a major breakout

And the JPY might not even work…

In a classic geopolitically-related risk-off environment, the JPY outperforms all currencies, but that’s not been the case in recent months.

The problem with JPY is the issue of soaring Oil prices. As Japan imports all their Oil, soaring prices causes an immediate dent in disposable incomes of consumers and profit margins of businesses. Not only are higher Oil prices a major headwind for the Japanese economy, it is likely to boost global yields and that would act as a headwind to the Yen that performs inversely to changes in yields.

CACIB built a ranking of G10FX which can explain some of the recent price action since the beginning of the Israel-Iran conflict. Their model captures the market impact of soaring risk aversion and economic consequence of higher oil as well as changes in other commodity prices. USD stands to gain the most as it’s got safe haven characteristics being by far the main financial currency of the World, a decent yield/carry, and arguably the more resilient of the major economies to ride a potential Oil supply shock. CHF is ranked 3rd, and JPY at 6th!

China and Japan dumping USTs?

I asked Perplexity to give me a table of major changes in UST holdings — nothing here to suggest anything to the extent implied by the word “dumping” when looking at the 18month changes.

First Trust Advisors also notes Foreign holdings hit a record high, indicating a broadening of foreign participation in US debt markets.

Recent bond auctions have been strong too!

What about US stocks?

It’s been widely noted that capital flows have favoured European assets due to optimism around Europe’s fiscal stimulus, as well as other emerging markets at the expense of the muddying outlook on US assets.

Looking at the recent performance of European stocks versus the US however, we have not seen anywhere near the kind of outperformance over that we saw around the turn of the year over the prior 2 months. In fact, the outperformance peaked as soon as Ursula VDL initially announced plans of Europe ramping up its defense spending.

When looking at the top US stocks versus the European and Chinese counterparts, the ‘portfolio rebalancing out of the US’ argument also looks rather unconvincing. The Mag7 is up +28.51%, while (in USD terms) China’s Terrific10 is up just +2.07% and Europe’s Granolas up a meagre +1.52% since April 21st.

I find this highly interesting considering that the Mag7 is up such a huge amount compared to a very slight depreciation in the Dollar (down -1.61% vs CNH and just -0.09% vs EUR) over that same period. In other words, while US under-performance did coincide with a massive USD decline in the first few months of the year, it has certainly not been the case more recently.

Though my core short US equities view isn’t consistent with the above observation, the point I’m attempting to highlight is that the sell-America trade was already over month’s ago.

Best long USD expression?

Antipodes NZD and AUD are already trading very weak (more than -2sd vs its 10-year average) followed by JPY (-1.52sd). EUR (+2.24sd) the strongest (I noted on X that EUR looks very rich relative to differentials of policy rate expectations and 2yr real rates), followed by CHF (+2.16sd), then GBP (+1.57sd) relative to their long-term averages. This draws my attention to EURUSD and GBPUSD on their historical strength as well as being fundamentally sensitive to Energy supply shocks, and I would leave aside USDCHF for reasons I’ll explain later below.

Looking at CFTC positioning (chart is in terms of USD), total net short positioning in USDJPY (Red) is at the most extreme as far back as the data goes, while EURUSD (Blue) is also deeply short USD by historical standards. USDJPY paritcularly stands out on this view.

1-month risk reversals rebounded strongly in favour of USD since the early-April lows. EURUSD turned net bearish (25delta implied volatility of puts > calls) last week to join GBPUSD, while USDCHF and USDJPY riskies has been on a solid uptrend since the April lows. On the magnitude of the moves in risk reversals, EURUSD and USDCHF are the standouts.

Based on all of the above, I would rank those 4 pairs as follows:

• Long USDJPY the most preferred,
• Short GBPUSD, then
• Short EURUSD,
• Long USDCHF the least (or not even) preferred.

USDCHF offers nice carry but I think CHF will perform strongly. Recall the CACIB model observed earlier ranked CHF as the 3rd best performer in our current environment, and if that's not convincing enough, look at the CHFJPY chart. GBP short is preferred ahead of EURUSD due to its higher sensitivity to risk-off and more fundamental headwinds than the EUR — a note from Lloyds highlights the challenging outlook for the UK which I’ve summarised below:

• Weak Productivity Limits Recovery Potential — a negative feedback loop of weak productivity that undermines growth and fiscal stability, and in turn further productivity weakness
• Acute Fiscal Constraints — undeliverable spending cuts and limited options to raise revenue because of manifesto commitments and already falling short of OBR’s borrowing targets leading to higher borrowing costs and rising debt servicing risks.
• Weak Goods Exports and Investment — sharp decline in goods exports raises concerns that some sectors may have lost critical mass, reinforcing long-term underinvestment and continued low productivity outlook.
• Interest Rate Cuts Unlikely to be Stimulative — structurally weak fundamentals and low interest-rate sensitivity among mortgage holders makes BoE’s easing unlikely to make a significant enough impact.

GOLD

Lastly some comments on Gold. Despite the geopolitical turmoil, I don’t have any conviction that Gold can perform in this current environment as it had already performed very strongly so far this year (up +28%), and being around the same levels as we saw during 21st-22nd of April (the Purple vertical Purple lines I marked in earlier charts to denote when the sell-America trade effectively ended) makes me think there is ample geopolitical risk premium in the price.

Also if we think back to 2022 when we last had a surge in Oil prices, Gold did initially breakout and follow Oil higher, but rolled-over very soon after as rates were undergoing a hawkish repricing in reaction to the inflationary impact from Oil.

I am therefore somewhat neutral on my view of Gold. If anything, Long XAUEUR would be the pick for me but the same conundrum on whether Gold can actually perform in this environment remains. If the rates market responds hawkishly to a surge in Oil prices, I would still not expect long XAUEUR to outperform EURUSD short.

— — — — — — — — — —

Retail sales was weak, Claims was steady week/week, FOMC’s updated SEP saw a bump up to the 2026 median dots with stagflation projected, and a hawkish leaning presser from Powell explicitly mentioning that they “expect a meaningful amount of inflation in the coming months”. Not much else to unpack so skipping the usual review of data and charts this week the market wholly focused on Iran, Oil and USD.

Good luck trading.