Forwards moving
As a brief comment on the recent banking turbulence, we maintain a strong structural underweight on the sector so we haven’t been affected. It is, however, a bit concerning to see the capital ratios once one accounts for leverage.
Now we are not single name analysts, but one cannot help but to wonder: if the capital is just under 7% and the RWAs had a drawdown of over 15% last year how solvent are they? Thankfully they don’t have to mark to market… right?
Carrying on to the inflation narrative, we made a good amount of money during 2021 and early 2022 with the fertiliser trade which we link to CPI, we sold that a while ago and have only seen them come down just as quickly as they went up. Therefore we do not expect a bounce in inflation anytime soon:
As we mentioned a few notes ago, a lower CPI would help the front end, we would expect the 6m-18m spread to become steeper, the inversion level is just astonishing to our eyes:
Moving on to currencies, we have noticed the best performer YTD of major currencies, the MXN peso is showing a strong divergence with a proxy we normally monitor, namely XAU/XAG vs USDMXN, call it, if you will the “Plata o Plomo" indicator:
The pairs trade for this is quite simple, long silver short gold and long USD short MXN, however, one must consider the real rate differential which at just over 380 bps, is a rather negative carry and reasonably explains the MXN outperformance
Following up with our UUP long, we added a bit this week and we have seen some interesting action in renminbi forwards, we visualise this by plotting 12m outright vs trade weighted dollar:
And last but not least, we think the above mentioned weakness in CPI and stronger USD will also help our call of a higher 5yr dividend yield for the SPX which has had a hard time breaking through the -50bps mark:
This is for informational purposes only, it should not be considered as investment advice and does not constitute any offer or solicitation to subscribe or redeem. Investment involves risk. Please consult a licensed investment professional before taking investment decisions.
All charts and graphs copyright © Bloomberg Finance L.P.