Describing my process + update on current positions
Covering shorts
Covering ETH/USD shorts at 1870
Over the weekend I heard some reports from a market maker that there were some large hedge funds and treasuries liquidating their holdings, as well as stETH (staked ETH in Lido). As of now, crypto markets are recovering aggressively and unwinding some of the idiosyncratic weakness against equities. Perhaps the weakness was a one-off due to the capitulation of several large entities.
The chart below of BTC looks encouraging, although a recovery wouldn’t be definitive unless we climb back above 30800.
Daily BTC/USD
I’m hesitant on flipping to outright long crypto for now because 1) it’s a long weekend and this move could have been due to illiquid conditions 2) Equities have already rallied a lot and I wouldn’t be surprised if they pull back 3) There are better expressions of being long risk, such as being long commodities
Current positions
Short USD against XAU, JPY, and CHF
Long Eurodollar futures June 2023
Long WTI
The short ETH trade was more of a tactical trade, based on technical triggers and my observation of price action relative to other correlated markets. If the trade gets invalidated by price action and the breaking of key levels, I get out. I’ve been running short USD and long oil since 1-2 weeks ago, and both positions come from my broader macro framework, which comes down to the following process:
Identify fundamental trends that are in motion and unlikely to reverse anytime soon. In this case, it is the weakening of US economic data (housing, PMIs, inflation, etc) and undersupply of oil caused by insufficient spare capacity and the Ukraine war.
Identify what markets are likely to move if these fundamental trends continue (the expression of the view). In normal times it’s easy to do this, but the recent inflationary environment has made this extremely difficult.
Wait for triggers to enter trades that offer reasonable risk reward - either pullbacks in a trend or completion of technical patterns.
Cut losses when risk levels get breached or new information arrives that either invalidates the fundamental thesis or tells me that I’ve chosen the wrong expression or wrong timing to enter the trade.
Take profits when target levels or trailing stops are triggered, or if the prevailing trend shows evidence of exhaustion.
If I think eco data is accelerating lower, why short USD FX instead of being short equities or cross yen or long Treasuries? Being short equities is problematic because sentiment and positioning in equities is so bearish that I don’t think we can get further downside without a rally first. This thinking extends to cross yen, which is correlated to equities. Long Treasuries could certainly work, and I am long EDM3 betting that the Fed won’t be able to hike from September onwards as much as the market is pricing in. However my view (and I could be wrong) is that short USD is the superior trade because the market already fully priced in an aggressive tightening cycle by the Fed, and are now pulling back those expectations. On the flip side, other central banks like the ECB and SNB are only now starting to grasp how far behind the curve they are and have recently been making hawkish comments. TLDR - Fed is going from very hawkish to less hawkish, while the rest of the world is going from a little hawkish to more hawkish.
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