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Thoughts From The Divide: Know when to Fold‘Em

BY JON WEBB
President Trump told us that the U.S. would get "a total of 55% tariffs" with China's tariffs set at 10%, adding that "Full magnets and any necessary rare earths, will be supplied, up front, by China. Likewise, we will provide to China what was agreed to”. A Chinese spokesman was more reserved. Lutnick referred to the agreement as a "handshake for a framework" which didn’t seem entirely consistent with Trump’s assessment. Usually, in these matters the best way of telling what happened is to look at the US-listed Rare Earth miners – MP Materials fell 8% yesterday, but was up 14% today, which might suggests that the market the market remains skeptical about China resuming rare earth supplies. Read more →

MI2 for C8 – JPY Liftshaft Alert

BY JON WEBB
There is a window emerging for position reduction in the widely held JPY carry trade. Positions are crowded at the same time that the rationale for the extension of the current benign regime is diminishing (carry, carry-to-vol, policy divergence, etc). There is no sense of danger within analyst expectations or embedded in option pricing. While we lack an immediate catalyst, sometimes price can be its own trigger. With USDJPY around 156 and an easily defined stop loss, the risk reward of engaging with JPY strength is compelling. Escalator / liftshaft price action provides significant convexity. Crowded JPY shorts would also need to be covered in the event of a risk-off catalyst coming from other asset classes. Owning USDJPY puts can be an attractive portfolio hedge for investors concerned about general market complacency or for more active tactical FX managers and traders. Read more →

C8 Currency Compass – The end of the implied USD equity hedge? – May 2025

BY JON WEBB
European investors now own 15% of US stocks, whilst they have reduced EURUSD and GBPUSD hedges over the past 4 years, as any risk aversion from lower US equities has driven EURUSD lower - being underhedged counterbalances US equity returns. However, this did not work last Summer and the USD has been notably weak during the recent equity sell-off (see full discussion overleaf). With this correlation reversed, we note that European investors now find themselves underhedged their US equity exposure. It has been a volatile month for FX however the USD held key levels and recovered from the lows as US trade policy has become more measured.  The longer-term risks remain for USD, as the Administration attempts to rebalance the US economy, whilst positioning is structurally long USD. Read more →
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