HomeSolutionsInsightsNewsroomPeopleContactLogin

Acclaimed macro analytics
Portfolio Construction & Risk Management
Trading Solutions
Macro Models
Thematic equity baskets

Announcements
Press
Blog

The chart shows those FX pairs in regime ranked by their sensitivity to Dollar liquidity (cross-currency basis swaps). A positive (negative) relationship means tighter $ funding levels move that currency cross lower (higher), every other factor held constant.

USDZAR & USDCLP both display strong negative sensitivity. All else equal, a Dollar liquidity squeeze drives Dollar fx higher versus the Rand & Peso. Moreover, both pairs screen as cheap making them efficient EM expressions should a funding scare take hold.

AUDUSD has $ liquidity as a top positive driver (the Aussie will suffer if money market stress continues), & it is rich to model.

For all three models, risk aversion & metal prices dominate. Higher metals offer an offset each time but, should funding stress evolve & prompt a broad 'risk off' move, these currencies look vulnerable.

At model fair value there is no valuation edge but EURUSD is interesting. Sensitivity to Dollar liquidity has increased fourfold since the start of the year & it has now replaced real yield differentials as the main macro driver.

Again, if you fear the fall-out from sanctions could cause liquidity issues, EURUSD is a key variable to track as money market stress spreads through the system.

The Ukraine conflict has now prompted another surge in inflation, but it is critical to understand the nuances.

The initial market reaction saw short term (2y - purple line) inflation expectations spike – they are now 2 standard deviations above trend. But longer term (10y - red line) expectations remained relatively contained. It was a classic commodity supply shock. Near term price pressures but limited impact for the longer term inflation picture.

That spike is starting to filter out the curve. Inflation fears are showing signs of potentially becoming entrenched. Arguably that diminishes the room for manoeuvre for Central Banks juggling the growth shock from the conflict.

Macro investors will watch the shape of the TIPs break-even curve as a critical gauge of how the markets view the inflation outlook. For equity funds less in tune with macro factor shifts, the Qi portal can provide a way to track both the underlying move in inflation & which securities are most sensitive.

The 10 richest models have a strong EM bias. South Africa EZA & Brazil could represent their status as commodity plays. Note macro model value is moving sideways rather than trending lower.

The three rich DM markets include Singapore EWS & South Korea EWY where presumably geographical distance helps.

Greece is not in regime but, to date, macro model value had not been declining. Mainly because it’s less reliant on low VIX versus other EU indices, & the fact it’s comfortable with rising real rates.

This is not to advocate new longs or shorts during incredibly uncertain times. But it does provide a framework to consider where, in macro terms, markets have moved to discount events in Ukraine. Strikingly, certain EM plays, & in the US small rather than large caps, are seemingly regarded as the safer place to hide.

Qi’s Optimise Trade Selection function suggests the European sector most vulnerable to spikes in risk aversion is Travel & Leisure. On current patterns, it is the only sector which falls by over 1% for a one standard deviation increase in European equity vol.

With a valuation gap of +0.5 sigma (+3.5%) EU Travel & Leisure is also slightly rich to macro. While it is true that the FVG was 1.6 sigma, +11.3% just a week ago, it is also striking that it is the only sector with a rich valuation on Qi metrics.

The critical point is that macro-warranted fair value appears to be heading lower. With risk aversion alone accounting for 30% of model value, further geopolitical stress means the sector is the one most susceptible to macro fair value deteriorating still further.