FX
USD
On May 30th I wrote a post explaining why I was bearish the USD (Framework for FX valuation – where is the USD heading?). Value seemed to me to be the most important driver and so I had paired a short USD view against a basket of currencies which I considered the most undervalued i.e. CAD, AUD, EUR, NOK and SEK.
This has been working very well so far.
However currently I do not think the USD has moved enough to warrant a reduction in my conviction level, as the long-term potential for the move is still far greater.
GBP
I have been very bearish on sterling for a long time. I may write a post explaining the key reasons in more detail, but essentially I see GBP as highly vulnerable for many fundamental reasons and it is heading towards a large negative trade shock with Brexit. This results in a heightened potential for a calamitous drop.
My 5th May post (Who loses more from Brexit? The UK or EU?) is where I laid out why the UK has far more to lose then the EU from Brexit. Since then sterling has performed very poorly vs. my basket of undervalued currencies (AUD, EUR, CAD, NOK and SEK.)
I retain my bearish view of the currency but am aware that it is hard to justify looking solely at historic value. My view for continued weakness rests on my view that Brexit will happen and very bad economic consequences will follow.
If there is a political earthquake leading to a U-turn, or perhaps the UK ends up in some permanent transition limbo within the single market, then I would revisit my view.
Equities
In early June I laid out why I was bearish on US equities. Since then they have barely moved. My views have not really changed but I intend to update my analysis given some interesting data releases since then. Most importantly wage growth has continued to disappoint which means that there remains an opportunity for corporate earnings to keep rising, despite lacklustre GDP growth.
Fixed Income
I looked at the front end of US fixed income on May 16th and noted that the continued slow drift lower in rates had been a good trade and that it could be about to change.
There has been no sign of a change at all in the market i.e. a very slow move to lower rates continues. This is not a trade I have any appetite to hold either side of.
The story is similar in the long end with little movement in any direction.
With mediocre growth and no acceleration in wage growth, there is no catalyst but my concerns with overall valuation mean I have no desire to own any fixed income at these levels.
Applied Macro 