#USDCNH dropped ~250pip 6.4100 to 6.3850 yday on prospect of Saudi Arabia SA receiving oil payment from China in #CNY instead of #USD

▪️ Pricing Ccy is different from Invoice/Settlement Ccy - SA can receive CNY but oil may still be priced in $$

1/5
wsj.com/articles/saudi… ▪️ China oil imports from SA ~$45bn pa, ~1.75 mbpd
▪️ What can SA do with CNY received
1. Pay in CNY for Chinese imports/services
2. Diversify FX Reserves into CNY away from USD
2a. Invest back into China onshore say CGBs

+ve for CNY internationalization
[SAMA FXReserves $420bn]

#China: Back In Focus
▪️ Poor credit data: Agg Financing CNY 1190bn vs 2200bn exp=>MLF rate cut possible 15 Mar
▪️ Biggest Covid crisis since Wuhan as cases surge
▪️ China Tech & HK stocks beaten down
▪️ Geopol: U.S. warns China
▪️ #USDCNH jumps to break 1m consolidation

1/6 ▪️ China reported 3,300 cases on Saturday - worst outbreak since early days
▪️ 17.5 million residents in Shenzhen placed in lockdown till 20 March

2/6

bloomberg.com/news/articles/…

scmp.com/coronavirus/gr…

#USDJPY: Next big trade or just a puzzle?
▪️ In 21st century, USDJPY spiked up >2% when S&P dropped >2% in a wk only on 9 occasions - last wk was one of them - prob of such occurrence <1%
▪️ Last wk $JPY 114.82=>117.29, S&P -2.9%
▪️ Dethrone Long JPY as macro risk-off hedge?
1/9 ▪️ Recent S&P drawdown -12.5% since 3 Jan'22 on hawkish Fed & Russian invasion but $JPY +1.0% with drawdown of only 1.4%
▪️ Regime change post Covid?
- Since Mar'20, $JPY vs S&P regression reveals significant -ve beta
- Previous Fed hikes (2004-06, 16-18) also showed low beta
2/9

#FX/#Rates thru 2016/18 episodes of 'Equity Tantrum' on hawkish Fed: Takeaways
▪️ Short USDJPY best FX trade in both periods
▪️ Short AUDJPY even better
▪️ Short EUR/Long DXY bad idea for risk-off
▪️ Gold/Silver good value here
▪️ Long USDEM not rewarding enuf
▪️ Bonds rally 40bp Dec 2018 Recap:
S&P -11.3% (30 Nov'18 to 3 Jan'19)
2y UST -41bp, 2.78=>2.37
10y UST -43bp, 2.98=>2.55
DXY -1.0%
Oil/WTI +0.30%
BCOM -6.2%
VIX 18=>25 (36 high)
HY OAS +119bp

But Dec'18 episode was late in hiking cycle=>had enough room for a 40bp bond rally. Lets look at 2016

2/7

Where is Fed Put?

In late 2018:
- S&P touched bear mkt in mid-Dec'18 (20% correction)
- Dropped 9% in Dec'18
- Dropped 2.5% on 3rd Jan'19
Then Powell did dovish pivot on 4th Jan'19: Fed "will be patient"

In 2022:
- S&P has dropped 7.73% in Jan'22
- Corrected 8.73% off peak

1/8 Fed's dovish pivot in early Jan'19

2/8
cnbc.com/2019/01/04/pow…

#Nasdaq v/s #FedFundRate:

Few comparisons of Fed's recent hawkishness with Powell's extreme hawkishness in late 2018

Nasdaq dropped 22% in Q4'18; currently 5.0% off its peak

1. Fed not really as hawkish as 2018
2. Fed has learnt when to back off. Or has it?
@saxena_puru

https://twitter.com/TruthGundlach/status/1478924452209459201?s=20

#FOMC Hawkish Minutes: #Fed Balance Sheet BS

Five topics discussed:
1⃣ Preferred tool for policy normalization: Rate hike v/s BS reduction
2⃣ Comparison with 2014 normalization
3⃣ Timing & sequencing of tools
4⃣ Size & composition of Long Run BS
5⃣ Yield Curve shape

1/12 Note: Quantitative Tightening = BS reduction whereas 'Tapering' is reducing pace of BS expansion (currently underway)

1⃣ Rate Hike v/s QT:
“Participants..emphasized..federal funds [FF] rate should be Committee's primary means for adjusting stance of monetary policy”

Why?

2/12

#JPY & Correlations:
▪️ USDJPY 114.80 ~5yr highs; last seen post Nov'16 Trump election; ~103.5=>118.66 in 5wk
▪️ JPY v/s G10 increased s/t correls=>towards 'Dollar world' (USDJPY ⬆️, AUDUSD ⬇️) v/s Reflation/Risk Off Cross-JPY moves
▪️ Recently JPY-XXX sidelined; may change

1/4 ▪️ YTD Long CAD/Short JPY still best G10-JPY Dollar-neutral trade but rise in correls recently
▪️ Since Nov FOMC, JPY-XXX lacklustre; most FX actually weaker vs JPY
▪️ Since Jun FOMC (hawkish pivot), USDJPY best then NZDJPY

SGDJPY a possible short JPY, Dollar-neutral candidate

#EUR Crosses & dovish #ECB:
▪️ EURUSD claims next big fig; on 1.13-handle; most FX stronger vs EUR (chart vs Nov FOMC)
▪️ ECB to increase upper limit for cash as collateral for Securities Lending (75 to 150bn)
▪️ LAGARDE: Conditions for rate hike very unlikely to be met 2022

1/8 f/e Euro bond futures lower on doubling of limit to 150bn for cash as collateral=>possible easing of collateral shortage in repo mkt

But last utilization only 15.5bn (Sep monthly avg) & peak daily util 40.8bn (Jun21)

FYG
DU Euro Schatz ~2y
OE - Euro Bobl ~5y
RX - Euro Bund ~10y

#Fed v/s Markets:
▪️ Mkt now pricing >2 hikes in 2022 vs Fed Dots @ 0.5 hike
▪️ Mkt @ 4 over 23/24 vs Fed 6 hikes
▪️ Mkt @ 18bp 0.7 hike by Jun'22 vs Fed to end taper only by mid-22 implies:
1⃣ Fed to hike with QE-buy (read #Powell 👇) OR
2⃣ Fed to accelerate taper by Mar'22

1/7 #Powell @ Jul-FOMC: "wouldn’t be still buying assets & raising rates...you’re adding accommod by buying & removing by raising.,,wouldn’t be ideal"

Sep-FOMC: "buying assets=adding acco..wouldn’t make any sense to then lift off...would be wiser..to go ahead & speed up taper"

2/7

#FOMC: Dive into DOTS
▪️ Besides any tapering ann'ncem't, DOTS or median rate hike projections important at 22 Sep FOMC
▪️ Current DOTS: 2022 (no hike), 2023 (2 hikes), L/T (~10 hikes)
▪️ FOMC to introduce DOTS for 2024 for first time - few calling for 3 rate hikes in 2024

1/9 ▪️ Recall: Fed's surprise projection of 2 rate hikes for 2023 was primarily responsible for Jun FOMC's hawkish pivot => DXY spiked ~2% over 2 trading sessions post June FOMC

So worth paying close attention to Sept DOTS to gauge risk-reward better

2/9

https://twitter.com/VaradMarkets/status/1433684556859600898?s=20

#US Core #PCE #Inflation:
▪️ Annualizing 4.8% in 2021 vs Fed SEP projection 3.0%
▪️ Last Jul 3.6%. Even if annualizes only 2.5% for rest 2021, full year YoY would still be 3.9%
▪️ Sept FOMC will have to revise higher from 3.0% towards 4.0%
▪️ Can 2022 proj be left at 2.1%? Core PCE MoM past its peak?
- 5y avrg 0.17%
- Post Covid avrg 0.30%
- Post Vaccine avrg 0.39% (since Nov'20)
- Post Covid peak 0.63% (Apr'21)
- Last July print 0.34%

Transitory assumption: will ease towards 0.17-20% MoM into H1'22 (equivalent to 2.0-2.4% YoY)

#DiveIn: Collapse in Term Premium TP

▪️ TP negative again after being positive for most of 2021
▪️ Excess yield investors require/receive to commit to holding L/T bond instead of series of S/T bonds has turned negative
▪️ Investors now willing to pay extra to hold L/T bonds
1/10 With 10y UST yield at 1.18% & TP at -0.10% => 1y yield is expected to avg ~1.28% over next 10 yrs

Term Premium?
▪️ Compensation investors demand for risk that S/T yields do not evolve as expected
▪️ 10y Nominal = expected path of S/T yield over next 10 yrs + Term Premium TP
2/10

#Macroscope: Weekly Snapshot

1⃣ Tapering: Divergent views
- Bullard wants taper to start in fall/Sep21, end by Q1’22, Delta temporary
- Brainard, possible Fed Chair, wants to see Sept jobs data (out on 8 Oct) to judge progress
- Overall Dec’21 announcement remains base case
1/10 2⃣ Virus
▪️ US cases further up; Delta now >80% of cases but more localized where vaccination remains low
▪️ "experts don't expect Delta to cause nationwide surge like winter wave"
▪️ To watch school re-opening
▪️ Herd immunity threshold probably pushed up, vaccination key
2/10

#Dollar = '#Fiat' Money?

Article rightly highlights QE just as asset swap & that Money is created by Bank lending, not Fed, it also revives interesting debate arguing Dollar not Fiat but Credit money

What exactly is Fiat/Paper money? Two definitions:
1/7
ft.com/content/5e5b2a… 'Fiat' Money:
1⃣ Into existence because of authoritative decree/sanction/order; no Intrinsic value
2⃣ Not convertible to or backed by other asset or commodity (Nixon Gold Std 1971; Britain 1931)

1⃣ Decree:
Dollars/Money = IOU 'I owe you' from Central Bank CB to Economy =

2/7

US #Employment Disconnect?

⬆️ Stronger NFP 850k vs 720k exp; 583k prev
v/s
⬇️ Higher Unemployment 5.9% vs 5.6% exp; 5.8% prev

To add to @jasonfurman:
Chart: Household Survey (Employment) historically more volatile than Establishment Survey (NFP)

https://twitter.com/jasonfurman/status/1410946244361531398?s=20

1/5 U3 v/s U6:
Well noted by @AndreasSteno; while normal Unemployment Rate U3 rose (5.8%=>5.9%), U6 fell (10.2%=>9.8%)

U3 = Total Unemployed / Civilian Labour Force
U6 = (Total Unemployed + marginally attached + employed part time for eco reasons) / CLF

2/5

https://twitter.com/AndreasSteno/status/1410957544042926080?s=20

#FX CFTC Positioning: Large short-USD position reduction post FOMC

▪️ Largest USD buying since mid-2018 v/s EUR
▪️ ~$5.85 bn USD bought vs G10 FX => mostly long EUR & GBP reduction & short JPY addition
▪️ Long EUR positioning ~half of Aug'20 peak but still double its 4yr avg
1/4 ▪️ Post FOMC's perceived hawkishness, short USD position reduction expected
▪️ Mkt still holding onto Long CAD, Short JPY, Long GBP
▪️ Interesting jump in Long CHF position => possibly reduced Long EUR/Short CHF, increased Long CHF/Short JPY

https://twitter.com/VaradMarkets/status/1401908703725457414?s=20

2/4

Three largest Asians may end up with early tightness:
▪️ #China: Never went too accommodative to start with + credit tightening
▪️ #India: Inflation surge may force RBI's hands
▪️ #Korea: BoK increasingly hawkish

KRW 2y IRS +17bp since May MPC
INR 5y NDOIS +11bp post CPI yday BoK's recent hawkishness => rates sell off (higher yld) v/s Received rates positioning:
🔹 'Normalization should not be put off too much'
🔹 'Rapid debt rise may hurt consumption'
🔹 'Should secure policy room for future issues'
🔹 'Inflation may accelerate faster than expected'

#China Credit Tightening?

▪️ Aggregate Financing AFRE or Total Social Financing TSF growth slowed to 11% yoy May v/s 11.7% Apr
▪️ Renminbi RMB Loan growth inched down to 12.2% yoy May v/s 12.3% Apr
▪️ Optically Broad Credit YoY charts look scarier than they actually are

1/9 ▪️ To start, target Fiscal Deficit 3.1% in 2021 v/s over 3.6% in 2020 => bound to be fiscal tightening by design
▪️ AFRE outstanding stock indeed points to recent marginal slowdown relative to post-COVID trend
▪️ But AFRE stock still above more longer term (4yr) trend

2/9

Role of #USD & #EUR in Global Monetary System:

[Charts from ECB Paper: 'International Role of Euro']

#Dollar continues to dominate FX Reserves, International Debt, Loans, Deposits, FX Turnover & Global payments

1/7 FX Transactions settled in CLS System (Continuous Linked Settlement)

▪️ USD led FX market => involved in ~90% of all settlements in Dec'20
▪️ EUR second most actively settled ccy

2/7

US #Inflation #DiveIn: CPI v/s PCE
Also why FED follows PCE?

▪️ Attached Summary of differences
▪️ Since 2000, overall CPI ~11% higher than PCE

▪️ Definition:
🔹 CPI: Out-of-pocket spending by non-institutional Urban Consumers
🔹 PCE: Includes Rural & all personal sector
1/12 Four Sources of differences: Scope, Formula, Weight, Others Effects

1⃣ Scope Effect:
🔹 CPI: Consumer Price Index => Survey of Households
🔹 PCE: Personal Consumption Expenditure => Survey of Businesses
▪️ 25% of PCE spending not captured by CPI

2/12