The US debt ceiling is the main risk event, the Dollar hangs in the balance – Month in Review: April 2023
Macroeconomic Environment Review
In April, the US Dollar traded within a certain range while different currencies performed differently. The Swiss Franc (CHF) performed the best, followed by the Euro (EUR) and the British Pound (GBP), while the Japanese Yen (JPY) and commodity currencies experienced losses. In the first week of May, the JPY and commodity currencies made some recovery, while the CHF, EUR, and GBP remained stable. This stability in the foreign exchange (FX) markets is noteworthy considering other financial indicators suggest increased uncertainty and risk aversion. US bank stocks declined by 15% in three weeks due to news of additional issues with regional banks. The sharp decline in oil prices and the further inversion of yield curves indicated fears of a global recession. Additionally, concerns about the US debt ceiling started to worry financial markets.
From a risk perspective, the US debt ceiling is currently the primary focus. Weaker-than-expected tax collections in April suggest that the US Treasury is likely to run out of cash in June. Consequently, negotiations between Republicans, Democrats, and the President will dominate the next few weeks. While a default is not expected, the process is expected to be messy, and a compromise may only be reached under pressure from financial markets (such as an equity sell-off) or rating agencies (leading to a downgrade).
Among the potential compromises, we believe a short-term suspension that connects the debt ceiling to the budget process in September is the most likely outcome. From the perspective of FX markets, the US debt ceiling presents a double-edged sword, and previous instances do not provide a clear guide. In our opinion, growing concerns are negative for the USD and particularly beneficial for safe-haven currencies like the CHF, JPY, and EUR in that order. With the high likelihood of stress intensifying in early June, targeted hedging activity is expected to put pressure on the USD in the coming weeks. However, the USD could also rebound if a sudden equity sell-off or rating downgrade triggers recession fears, as was the case in 2011. Furthermore, the eventual resolution of the conflict, even if messy, is likely to benefit the USD as well.
Monthly Performance Review
During the month of April 2023, AENAON Syncro Strategies generated the following total returns net of fees:
Across the spectrum of our benchmark indices, our strategies’ performance during April was strongly positive. As a comparison, the US S&P 500 equities index gained 1.46%, the Barclay Hedge Fund Index posted a 0.42% gain, the Barclay CTA Index added 0.94% while the other benchmark indices can be seen on the chart below.
Chart 1: Monthly Performance vs. Benchmark Indices – April 2023
Charts 2, 3 and 4: Inception-to-Date Performance vs. Benchmark Indices
You can always review our updated factsheets at the following Fundpeak links, with monthly performance updates and statistics since inception: