June sixteenth, two thousand twenty-five to June nineteenth, two thousand twenty-five

I. Foundation 

resistance to change and hence greater dependability for the results shown in the past.

Adding a note on the lagged effect of housing in CPI

Half a year ago, we discussed data lags in broad terms. See Notes241230 Inflation Catch-up in Macroeconomic Data: Consumer Prices and Input Costs Today, we are adding to that discussion on the particularly important housing component.

Chart: Lag in housing data

Core goods account for only about 20% of the core CPI basket; services and housing are what truly drive the inflation trend.

Chart: Shelter has a large weight in core CPI and a major impact

The lag in housing works in both directions. In the middle of 21, for example, the U.S. housing market was extremely hot, but the Shelter CPI also failed to reflect this in a timely way because of the lag, leading the Federal Reserve to “misjudge the situation” and delay its rate-hiking cycle. Today, this “lagged decline in housing inflation” is still underway—which means the Fed’s actions are likewise lagging and delaying the pace of rate cuts.

Chart: Core CPI calculated using real-time Shelter data had already returned to 2% 18 months ago, while lagging official housing inflation continues to push up official core CPI, limiting the Federal Reserve’s room to cut rates.

Driven by the decline in the Shelter component, official core CPI will continue to fall for the foreseeable future.

2025.06.17

Who is doing EUR/USD

The dollar has depreciated 7% year to date and has fallen against almost all major currencies. At the start of the year, international investors had low hedge ratios on the dollar because, for a considerable time, they had received extra compensation from holding U.S. assets in both underlying asset returns and currency returns.

Take Sweden as an example: U.S. assets held by retail investors there have fallen 24% year to date, and half of the decline comes from valuation changes (that is, currency factors)... It is clear that the rise in currency risk is having a material impact on allocation decisions. Even if global investors continue to hold U.S. assets themselves, the dollar could keep falling as long as they further reduce their dollar exposure.

Leaving aside the geopolitical shock to EUR discussed yesterday, One key point drawing our attention to euro trading is the presence in the market of buyers who are clearly insensitive to price...

At the beginning of the year, these buyers were global HF; starting in the second quarter, Real Money accounts took over:

Chart: Who is buying

The distribution of price-insensitive buyers in the market can, to some extent, help gauge how far the so-called “great FX market transformation” has progressed—or, put another way, how this new exchange-rate mechanism for hedging the dollar is developing.

Chart: Changes

By region, demand for EUR/USD from European Real Money accounts has been particularly notable recently, while participation by accounts in the Americas remains limited; the behavior of these American funds merits continued attention.

If we take the data through the end of last week, excluding the Iran war, Although the dollar found some support among hedge funds last week, particularly against the euro, Real Money still viewed pullbacks in EUR/USD as buying opportunities:

Chart: Real Money still sees pullbacks as buying opportunities

What matters more in this chart is the official accounts, Official funds are showing typical contrarian behavior: buying dollars on pullbacks and selling euros when the euro strengthens.

This is consistent with the “asset allocation rebalancing” logic (if central banks want to keep the proportions of their dollar and euro reserves unchanged after the sharp FX market fluctuations this year, they must buy dollars when the dollar weakens and sell euros when the euro strengthens).However, this also indicates that the official sector has not made a clear decision to reduce its dollar holdings, even through passive reductions caused by valuation changes. Otherwise, EUR/USD might have appreciated more.

2025.06.19

II. Insights 

Our Viewpoints and ideas on market...

A Rare Macro Trading Opportunity: Starting with Soybeans

Last year, before Trump took office, we made a soybean trade on the platform. The main domestic proxy instrument was No. Two soybeans (which are very strongly correlated with U.S. soybeans),We opened the position in 11 month, on 7, and after that, the price moved steadily lower as expected...

Chart: The day after publication, a new downward price move began

Long-time readers of our community will remember this trade well; it was one that drew attention beyond our circle...

It also directly helped produce a fairly satisfactory performance for us in 24...

Chart: Notes 241107 experts look at soybeans

This is a very typical macro trade trajectory: cross-market asset dynamics can produce a clear-cut, large price move within a single market, the day after the post was published, Soybean No. Two fell all the way from its peak, reaching its lowest trading price in more than two years.

Using this trade as a starting point, today we’ll discuss a few other things, We’ll first provide some background on soybeans as a commodity, then discuss why another trading opportunity closely linked to soybeans is emerging at this point in time...

This trade combines long exposure to multiple soybean-related assets and commodities, short exposure to the dollar, and a uniquely asymmetric structure with a built-in margin of safety..

We’ll reveal it at the end of the article.

1. In agricultural commodities, two categories have appeared frequently in USDA reports so far this year: corn and soybeans. And Compared with corn, China has far greater influence in the global soybean market (accounting for 60% of global consumption) and is more exposed to tariff uncertainty.

2. China is in fact the world’s largest soybean importer, with its import dependence remaining above 80% over the long term and its sources of imports relatively concentrated.Feed grains as a source of protein, especially soybean meal, are regarded as one of the main risk points in China’s food security system.Demand for soybean meal in animal feed is one of the key factors driving soybean imports.

According to data from the U.S. Department of Agriculture (USDA), China’s agricultural imports from the United States totaled 2024 billion dollars in 247, accounting for 14% of that year’s U.S. agricultural and food exports.

The main import categories include soybeans, beef, cotton, coarse grains (excluding corn), nuts, dairy products, and poultry meat and products.Of this, China imported 2210 ten thousand tons of soybeans from the United States, equivalent to 21% of China’s total soybean imports of 1.05 hundred million tons for the full year 2024, and to 19% of China’s soybean demand for the year.

Chart: Soybeans stand out far above other major agricultural imports in China’s import dependence

Another chart makes this clearer: this is China’s soybean consumption and import dependence since 1995:

Chart: Heavy reliance on overseas supply

It is now very clear why soybeans are considered one of the main risk points in China’s food security system.

For the full year 2024, China’s total agricultural imports from the United States were 247 hundred million dollars, of which soybeans accounted for 52%:

Chart: Why soybeans are the greatest and most direct risk in U.S.–China agricultural trade

3. In fact, in this area, we have also been looking for alternatives to curb excessive growth in soybean imports and address overseas dependence. Where action is possible, we have indeed quietly done a great deal...

As of this year, China has established a strategic reserve system for soybeans, which can slow the pace of imports if the trade war potentially escalates. China imported about 2024 hundred million tons of soybeans in 1.12, and imports are expected to fall to 1.04 hundred million tons this year.This is markedly different from the market environment during the previous U.S.–China trade war, because China had not yet established a strategic soybean reserve system at that time..

That said, Any structural change inevitably has to be assessed over a ten-year horizon, which naturally means this pattern of dependence will be difficult to change in either the short or medium term.

4. Beyond strategic reserves, China is also accelerating the shift in its soybean purchases from the United States to Brazil. This trend continues to drive the expansion of planted areas in relevant parts of Brazil, further weighing on U.S. soybean prices.

In 2018, when China imposed 25% in retaliatory tariffs on U.S.-grown soybeans, the landed price of U.S. soybeans (CNF China) briefly fell by nearly 100 dollars per ton, while Brazilian soybean prices remained largely stable..

The current round of retaliatory tariffs on U.S. soybeans by 135% will most likely produce a similar outcome:

Chart: The spread structure through the lens of tariffs

5. With that background covered, Why are we bringing up soybeans again today..?

Chart: CBOT soybeans

Taking a step back to look at the bigger picture, compared with the range-trading opportunities we saw before, soybean futures have actually remained in an extremely compressed range since the second half of 24...Between the tariff narrative, the planting debate in the U.S. Department of Agriculture’s survey report, and the shift toward Brazil, soybean futures’volatility has continued to compress and prices have moved sideways. This is quite unusual; as of now, the percentile for this narrow range is close to its low for the past 20 years..

Chart: Weekly chart

Compared with the decline in the previous trade, this time prices are instead beginning to test the upper edge of the trading range...

Such unusual, subdued volatility is often a precursor to most macro price breakouts..

As we’ve said before, a delicate balance often signals dangerous volatility..

The U.S. government’s proposed 26 and 27 biofuel requirements are giving soybeans a new narrative Under this new narrative, a larger share of domestically produced U.S. soybean oil will have to be used as feedstock for renewable diesel production, while at the same time, the period when tariff issues had their strongest and most damaging impact on the market has already passed.

This means that if trade tensions ease, the upside will follow, while the downside is bounded. An asymmetric risk–reward opportunity over a longer time horizon is gradually taking shape, with strong capital support on the downside, an upside breakout seems to be the more likely direction; our view is waiting for confirmation from capital flows...

6. We won’t trade soybeans because there are better choices..

Even so, we won’t trade soybeans directly, because there are better choices in the market to express this trading view, with more suitable risk–reward ratios.Within the same narrative, assets following the same trading path can still have different risk–reward profiles. Choosing which horse to back can sometimes matter more than correctly judging the direction...

In a market that few people are watching, a trade structure is taking shape that expresses a long position in soybeans and commodities and a short position in the dollar, with a unique margin of safety is taking shape..

Chart: Brazil’s stock index

Some sharp readers have already guessed... after all, only three places appear throughout this article:

China, the United States, and Brazil.

Brazil is a major soybean exporter globally, the most important third party in U.S.–China soybean trade, and currently China’s only alternative outside the United States. In fact, China really is placing orders on a massive scale with Brazil...

If soybeans themselves could see a price breakout, whatever the reason, Brazil would be a direct beneficiary...

Using a Brazilian stock index as a proxy for a soybean trade can, on the one hand, smooth out the uncertain swings in soybean trading driven by news and media narratives while capturing the upside from soybeans. On the other hand, Brazil’s own underlying economy provides an even more asymmetric margin of safety for this asymmetric risk–reward opportunity...

Over the past two years, the Bovespa index has remained within a relatively narrow range and is now approaching its all-time high (our observation level is at 140500; the core position was established long ago. This trade was actually mentioned earlier in our public account when we selected macro reading recommendations. Latin American assets are among the most undervalued assets in the world today, and the market’s 12-month forward price-to-earnings ratio is only 8.5. If it breaks out, we will increase our position). Domestic fundamentals and macro conditions should also provide considerable support for an upward breakout.

There is one more point to mention:Most Brazilian companies are primarily engaged in exporting large volumes of commodities, which gives them a real advantage in the current macro environment, Going long Brazil is essentially also taking a layer of commodity exposure and a layer of short-dollar exposure; it is a consistent expression of our multiple macro views:

Chart: Notes 250613 Three triggers for a dollar decline

In addition, The Brazilian central bank previously raised rates to 14.75%. While supporting the strong performance of BRL, this also means inflation may gradually come under control, creating room for future rate cuts and gains in the stock index;

From a fiscal perspective, Brazil will hold a general election in 26 10. The right-wing party favored by the market currently has an advantage in the polls and may ultimately take power; incumbent President Lula is also likely to push for economic stimulus before the election...

If our observation level breaks out, we will take part in the move betting on a breakout above the all-time high.

2025.06.16

Why might FOMC turn unexpectedly dovish?

Ahead of the upcoming FOMC meeting, market views are sharply divided. Many expect the dots to reduce the projected number of rate cuts from two to one... But at this point, the Federal Reserve may instead deliver a rather unexpectedly dovish statement。

In fact, the Federal Reserve has long had a strong desire to cut rates (this has been part of its nature since its creation); it was simply unable to do so before.As noted in Notes 250528, the Fed had already been pushed to the very end of the decision-making chain. Now, for the first time, it has an opportunity to use 5 month CPI and expectations for core PCE as cover, so it will naturally be more inclined to use the opportunity to move its stance closer to rate cuts rather than further away.

Go back to the beginning of 2019. At the time, Powell clearly turned dovish and said in a speech that the rate-hiking cycle had ended and the Fed’s focus would shift to maintaining an accommodative financial environment:That summer, the average month-over-month core inflation rate was 0.2%, higher than now; the unemployment rate was 3.7%, lower than now and stable. The Fed then cut rates from 2.25% to 1.50% in the third quarter.

Today, the average month-over-month core inflation rate over the past three months is 0.14%, with weaker services inflation. The unemployment rate has steadily risen to 4.24%, while interest rates are still 200 basis points above the summer of 19...

At present, the only argument that might support a hawkish stance is that the statistical period in the latest CPI covered only half of the effective tariff adjustments, but core goods inflation remains negative month over month, indicating that U.S. businesses are being very cautious about passing on costs..This means we may not see such pronounced data changes in cost pass-through.

The market is currently pricing in a 18% chance of a rate cut in July and 75% in September.

This means that in trading expectations, if FOMC surprises, the surprise is more likely to be unexpectedly dovish, and that would directly bring a rate cut in 7 into the expected range.making At this point, the risk–reward of going long the probability of a rate cut in 7 ahead of the meeting is very attractive (the odds are good)—because the worst case is only a fall from 18% to 10%, while the favorable case could see it jump from 18% to 60%-70%..

The structure behind it remains asymmetric.

However, summer tariffs will still have a fairly noticeable effect on monthly inflation, so in terms of actual action, FOMC is unlikely to act before 12; the earliest it might move is 12. This time, the change in pricing is most likely driven by a shift in expectations prompted by its statement.

2025.06.17

Discussing the FX positions I’m holding and the two phases of geopolitical trading

The ongoing situation in the Middle East is forcing us to reassess our current FX positions—in the euro-dollar options market, the call premium on the 1-month risk reversal has suddenly disappeared, following a period of elevated premiums...Such a sudden, sharp decline is rare historically and often signals something unfavorable.

1) Several comparable historical episodes occurred in 04, 07, 08, 09, 13, 18, and 20

2) Only three of those instances supported continuing to hold euro positions

3) Of the three, one rally continued for a month, and another lasted three months

4) Only in 07 was there a significant rally after a pause..

At this point, the key question in the debate over whether to keep holding the position is Determine whether this pricing shift signals the end of the bullish euro-dollar narrative or was merely triggered by rapid deleveraging amid panic over the situation in the Middle East，At present, the latter seems more likely, meaning this is not a genuine bearish signal.

However, this also reminds us of the risks in the trade we are holding.

In the first phase of geopolitical trading, the dollar’s reaction often suppresses gold’s price response; that is exactly what we have seen from the launch of the missiles through today. In the second phase, if the situation continues to worsen or persists, gold and the dollar move from offsetting one another to rising together.

The U.S. Dollar Index is now very close to this downward trendline in place since the beginning of the year; today’s FOMC dovish bets may be the key trigger for a breakout,

We can wait and see.

Chart: The two phases of the dollar, gold, and geopolitical trading

We will closely monitor the synchronization of the U.S. Dollar Index, the dollar, and gold to decide whether to keep or exit the euro position.

2025.06.18

III. Market Pulse 

Our latest Comments on the economic and market environment

Note: All content in this article is for reference only and does not constitute investment advice, nor does it form the basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for their decisions.