PAUL KRAKE - Is being deliberately contrarian a strategy? (part 2)


Is being deliberately contrarian a strategy? (part 2)

(This is the final part of the Weekly Blotter. The first part can befound here)

(....) Wednesdays UK inflation reading should confirm what the EU and US appear to be telling us that inflation globally has peaked. Tariff pressures / rhetoric is only going to get worse and while this could lead to spiking prices in the sectors effected, the initial response is growth negative.

With market positioning skewed heavily short across the US yield curve, what is the catalyst for long dated yields to make new highs? I see very little, so buying fixed income as US 10-year yields move above 3% is sensible. Contrarian but sensible. The same applies for the USD. While currency pairs are always a little more complicated than fixed income because you have to deal with the fundamentals of two economies, many of the reasons that US rates look capped can be applied to the USD. The DXY has been roughly 90-95 for most of the year and fading strength and buying weakness has proven a clever strategy. For me, the best expression of a short USD strategy with the USD and long dated yields at the top of their trading ranges is against the Yen. Since the inauguration of President Trump, the Yen has been stuck in an historically tight range with most of the time spent between 108 -114. However, for all the hyperbole about USD strength in recent months, the broad range continues to be one of the USD making lower highs and lower lows. Again, I am no technician but what is the fundamental catalyst for the Yen or the USD to do something different? Selling the USD and buying the Yen with a stop at 114, targeting 107 and below on a nine-month view is compelling.

Finally, crude oil, like most other assets in 2018, WTI has been stuck in a range, between $64 - $71. Is there a true reason for oil prices to move significantly higher to establish a new trading range? Iranian sanctions are well telegraphed and while Chinas current stimulus would historically put a bid into the oil market, trade concerns are offsetting this.

Over the next two weeks, we are going to break up our model portfolio into a tactical and a structural page. This should make it much clear to those of you for focus on our shorter- or longer-term ideas. We will still aggregate our returns, but this new format will give you great clarity on our thinking.

Tactically, we believe that the next four weeks will see the ranges that have prevailed for most of 2018, in the USD, US 10s, USDJPY and Crude oil continue. As such, the thematic model portfolio will establish a tactical basket of Long US 10-year bonds, Short WTI and Short USDJPY.

  • Short 25% position in USDJPY @ 112.20 (stop 114.25)
  • Long $75,000 bps @ 3.01% (stop 3.15%)
  • Short 10% position in WTI (stop $72.25)

Structurally, I will also add $75,000 to a long 10 Gilt position above 1.50%. Brexit remains a mess and I see no political avenue for PM Mat to negotiate a deal that could pass an increasingly dogmatic hard Brexit caucus in the UK Conservative Party.

This week will be filled with the aftermath of tragic natural disasters on the Atlantic Coast of the United States and South East Asia. Damage to Hong Kong and the Carolinas is extensive and will require a fiscal response. The Bank of Japan, despite rising rhetoric should prove a non-event but hawkish talk would boost the yen. The rest of the week is light for data. On Monday, EU CPI. On Wednesday, UK CPI and PPI, and the US reports on housing. On Thursday, New Zealand GDP. On Friday, Japanese Industry Activity, PMIs of Japan, Germany, the EU, and the US are released, and Canada prints CPI.


The View