Sunday, 7 July 2013

Rate resistance coming up and what it means for the Dollar?

With a rather bullish (195k) NFP print, taper sensitive assets got hammered. This led to a range of 24bps for  the 10 year benchmark. With this Gold got hammered as the dollar got strongly bid (smashing EUR support) and of course stock were going to rise no matter what - if <estimate then strong due to later taper expectations, if >estimate then economy is stronger and so real money investors buy in and push stocks higher.

But, we can now see there is some significant resistance ahead for rates and the USD. There are many technical reasons but ultimately the next move will be decided by a few sentences spoken by Bernanke on Wednesday.

Either way, here is a look at the US 10's and it shows some strong resistance at 2.75%/2.78%. For me this level is crucial as if we see a further sell off in UST's then 3% is most likely.

UST 10Y. Reuters
Slow stochastics have diverged hugely from recent price action and this is a hidden bearish indicator at these extremes. For this reason, I'm looking to buy into 10's Sep futures contract at 124*16. This represents a yield around 2.74%. However this will change depending on where we open this evening.

Furthemore looking at the US 2s10s, we can see it has come a long way in the past few weeks (unsurprisingly) but it looks like it can't really go too much higher in terms of a long timeframe trade.

US 2s10s
at 233bps, I will consider trading a flattener at 240bps for some consolidation but for the sake of my other trade I hope it doesn't get that high.

So what does this mean for the USD? Well, with the higher yields the USD is becoming more and more attractive and this has actually lead through into a higher USD as we appear to be coming out of the worst parts of the global recession. This is shown by the shift in correlation between USD +UST's from negative to positive as the US economy has strengthened when considering 100 periods.

So we can see that if yields turn around the USD will likely follow, on top of this, stochastics look prime for a crossover signalling a top in the market.

So on top of being long bonds, I will also short Dollar index futures on the open, somewhere around 84.75.

Overall I'm looking for a move back to 2.6% on the 10 year and 84 to 83.50 on DXY.

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