We have been caught on the wrong side of what is effectively one large, cross asset correlated, position squeeze. We square long USD against commodity and Emerging Asia FX (MYR, TWD, NZD, CAD and AUD). We also square short EUR/USD exposure.
Oil and commodities broadly higher, cross asset volatility lower, stocks and corporate credit higher, EM, higher, dollar lower, commodity currencies and EMFX higher, notably including Asia regional FX. We favoured the other side of most of that into October, predicated not on early Fed tightening but more on anxiety over:
China-led falls in global FX reserves and the vol-inducing QT implications; fallout from the explosion in total debt levels in lagged response to the earlier surge in the USD; and continued very weak demand and oversupply in commodity markets.
We suspect that these anxieties return strongly to the fore and our multi-month views are unchanged. But position squeezes like this early October one are painful.
