One Pro Reveals His ‘Just To Get Myself Into Trouble’ Trade

This is my “buying a hedge in another market just to get myself into trouble” trade.

[Editor’s note: The following excerpts are from a longer piece by Kevin Muir, formerly head of equity derivatives at RBC Dominion and better known for his exploits as “The Macro Tourist.” The full piece is available exclusively to his subscribers. Those interested can check out the new MacroTourist here.]

I’m sure you’ve heard market pundits express concern about the US dollar. It’s not uncommon for them to argue that we’ll get another deflationary impulse, and with that, the US dollar will surge, snuffing out the risk rally.

And when we look at a chart of the inverse of the US dollar index (white line) versus the S&P 500 (blue line), their concerns seem justified.

If this relationship continues, then a sharp rally in the US dollar might well be the trigger that ushers in a correction in the stock market.

Many of these US dollar bulls will point to the extended nature of speculative positioning against the greenback, and say something they view as extremely witty and poignant, like “I’m sure this will end well,” while highlighting the following chart:

That figure represents the total speculative positioning of currency futures on the CME. There’s a massive $30 billion short against the USD.

Sure seems ominous.

But before we rush out to buy US dollars, let’s dig into the numbers a little more.

I’ve created a bunch of charts for the major currencies. There are two versions. The first is the net total number of contracts held by speculators (longs represent a bet against the US dollar). The second is what percentage of open interest this speculative position represents.

Given the massive US dollar short, we should expect to see lots of large positive positions. Let’s dig in and see what the data shows.

Starting with the Yen:

Speculators are definitely long yen, but the absolute number is not unusually large. Nor is the percentage of open interest.

Hmmmm…. not exactly what we would expect. Must be the other currencies.

What does the pound look like?

Ooops. Basically a nothing burger. Must be Brexit jitters.

I’m sure the others will show big speculative longs. How about those commodity currencies? Surely, the specs must be long the Loonie.

Go figure, eh? Barely long. Not what we would expect.

What about the Australian dollar?


Geez. The specs are actually net short.

What’s going on?

The USD has a massive speculative short position against it, but most currencies show barely any excess.

Ahhhh… Kev, you missed one.

Yup. The Euro. What does it look like?

There it is!

The specs are focusing on the Euro. That’s where they’re betting against the USD.

When compared to total open interest, it’s not as impressive, but the position is big. No doubt about it.

Now, let’s have a look at whether the Euro’s rise has coincided with the stock market’s.

Here is the Euro (white bar) vs. the S&P 500 (blue line):

Not perfect, but there’s a definite loose relationship. Granted, the fit against the DXY index is tighter, but this is close.

I’ll cut to the chase. I’m buying Euro puts.

I’ll get into the whole rationale another time, but I view this as a way to hedge some of my risk-on positions. To me, this is where the speculation is heavy, and most prone to disappointment.

Vol is not the “cheapest it’s ever been,” but it’s cheap. Here’s the five-year chart of the 25-delta 6-month put vol.

This is my “buying a hedge in another market just to get myself into trouble” trade.

Maybe it’s not even a hedge. But, I like owning Euro currency puts in here.

Now, as I conclude, I’ll leave you with two additional charts to ponder.

The first is the EURJPY versus the S&P 500. (I actually like shorting EURJPY even more than EURUSD, but that’s a story for another day.)

Finally, the AUDJPY versus the S&P 500.

I used to follow this closely, but the relationship broke a couple of years ago.

Well, it looks like it’s back, baby!


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3 thoughts on “One Pro Reveals His ‘Just To Get Myself Into Trouble’ Trade

  1. I’m just a guy in the balcony who drops peanut shells on the floor. Honestly, I do. Doesn’t it make sense that maybe FX might be one of the next two or three next big thing “assets” once the last hand forged steak fork is stuck into the bond bull?

    Unless one is a pension fund, with such charter requiring some percent UST, or a retail rube, present company excluded, who is going to want to be in bonds?

    I say let some UST go negative. A last hoorah. Then, I’ll see if I can re-open my EverBank account and buy Icelandic króna.

  2. There was an article on FT recently talking about how the Eurozone is pushing to break off of USD commodity trades such as focusing on euro denominated trading of oil instead of WTI. If this comes to fruition wouldn’t this massively strengthen the Euro since they wouldn’t be borrowing in dollars? I could be misunderstanding this narrative…

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