Trade the Extremes
USD on the Rise Again
Crypto Unable to Sustain a Rally
Whilst Friday the 13th is unlucky for some it wasn’t the case for equity bulls. Last week had seen markets get battered, especially crypto, as it seemed no one had a positive outlook on the economy. We have been saying for a while that rallies seen, in our opinion, would be short lived and Friday’s was no different.
Overnight, poor data out of China poured cold water on the rally as stocks and crypto turned South. We really find ourselves torn. Looking at equities and crypto, which have come such a long way – we, on one hand, say to ourselves that these are all incredible buying opportunities. On the other hand, we struggle to see how risk will have an extended rally in the current sentiment. This leads us to believe that trading the extremes continues to be the best way forward. Until we get more clarity on rates and any impending recession, risk will struggle and volatility will continue to be heightened.
Crypto markets continue to hold in well considering the events of the last 10 days. UST’s demise shows that crypto isn’t too big to fail but continues to be too big to ignore. It is never nice when hard working people lose money but if any of the stablecoins were going to fail it is probably a good thing it was UST. A failure of a stablecoin that is backed by assets such as treasury bonds and commercial paper would have far wider reaching consequences. What is clear in our minds (and a lot of others) is that crypto is here to stay and in a few years its applications will be integrated into all parts of the economy – events like last week do provide opportunities to invest at levels mere weeks ago you could only dream to see. Saying that however, it is the wider macroeconomic narrative that is stopping us from allocating substantial funds at this level. Once we have signs (comments from central bankers, inflation data, economic data etc) that central banks have reached peak hawkishness we will be happy to re-buy crypto that we sold a few weeks back. What the crypto market is screaming for is a week of calm. We feel equities are getting close to a bottom and if we can get a calm week then the time to substantially stick our hands out to buy risk may be sooner rather than later.
With our view that equities may be reaching a bottom, we are naturally thinking the same when it comes to FX. Positioning and expectations are at an extreme – all everyone is talking about is EUR/USD sub 1.0000 and GBP/USD may be the most over subscribed position out there at the moment. The world and their pets think the FED is hawkish – but just how much more is the question we are asking ourselves. Whilst we aren’t buying EUR or GBP quite yet we don’t think short either pair at these levels is the right play. It comes back down to trading the extremes. We will remain nimble and keep stop losses fairly tight until we gain clarity.
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