Global Macro Update: Fed cut roadmap playing out, adjusting our top ideas

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VP Research

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Our “buy the rumor, sell the fact” playbook around the September Fed meeting is playing out, where the Fed cut marks a tradeable low in yields and the USD while ultimately supporting further equity gains. (See our Notes on the pre-Fed setup (link) and past “no recession” easing cycles (link)). We still like our long USDKRW and short EURUSD positions to play for the USD short-squeeze.

In the very short-term though, we like adding a tactical long VIX position amid signs of complacency (link). In light of this, and given some big price moves over the past week, we are narrowing the focus for our top global macro trade ideas:

  • Close long CADJPY: Take profits on the back of the post-election sell-off in the yen.
  • Close Long INDA: Take profits due to lack of catalysts to attract foreign inflows again.
  • Close short CNHINR: Close for flat PnL. We are moving on as the price action has failed to follow through on typical LPPL bubble climax signals.
  • Change UK rates recession trade: There are signs that inflation is peaking and that the BoE will need to shift to more rate cuts next year as growth slows. Given the latent stagflation risks, a more precise expression of this is to focus on the SONIA curve (SFIH6H7) and short the Mar-26/ Mar-27 SONIA spread (i.e. betting on more cuts in this period) instead of just receiving 2y yields.

Take profit on CADJPY

Our long CADJPY was based on 1) overblown recession fears in Canada despite leading growth indicators improving and 2) a weaker yen as market pricing looked too hawkish with signs of inflation peaking (See the Canada and Japan pages of our latest EM/DM LIW report.)

After a large move, we are taking profit. On the JPY leg, the sharp sell-off in the yen due to the surprise election results reflects an unwind of speculative long positioning. Our original thesis for a weaker yen remains intact, but we prefer to revisit JPY once politics-driven volatility dies down. CAD has also been underperforming most other G10 FX over the past week.

Close out long INR, long INDA on weak price action

We still like Indian equities as an allocation (link), but the lack of follow-through in price action has led us to close out our long INR and long INDA trades.

We recommended short CNHINR a few days after our LPPL Bubble and Fast Money models triggered sell signals for the pair. However, the price action has not matched the expected return profile. The position is positive carry, but we prefer to move on given our roadmap that the US dollar is likely to rebound and could keep INR weak.

We also expected the rupee and Indian equities to benefit from a pickup in foreign inflows that reversed abruptly after President Trump imposed 50% tariffs in August. For now, Indian equities lack a catalyst, so we are taking profit on our trade initiated in February (link).

SONIA (SFIH6H7) curve trade to bet on delayed Bank of England (BoE) cuts

The market has been focused on the “stagflationary” outlook in the UK, with stubborn inflationary pressures limiting the BoE's ability to cut interest rates to address the deteriorating growth outlook. There are signs of inflation relief over the next 3-6 months. The CBI selling prices survey and the ONS hospitality price survey both point to some disinflation.

There is currently less than 1 cut priced in for the BoE until the end of 1Q26. This is understandable given headline UK CPI is at 3.8% YoY, core CPI is at 3.6% YoY and real-time proxies such as Truflation is at 3.3% YoY. 

What looks mispriced to us is what happens after March. The March 26-27 SONIA (SFIH6H7) spread is only discounting 13bps right now. If we are right that disinflation is on the way and that the UK growth picture remains ugly, then there is plenty of scope to price in more cuts and for this spread to widen.

See our Top Global Macro Ideas for a summary of current and historical ideas.