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19 Aug 2013
What’s the message behind the DXY / Treasury divergence?
FXstreet.com (Barcelona) - Last Thursday, the DXY plummeted surprisingly even as Treasury Yields blasted through resistance to make new highs. Analysts are rushing to put forth reasons for the divergent action.
Analysts are divided as to the causes of the divergence
Some analysts have already come out and noted that the bond market (with its dropping prices and rising yields – yields that made new short-term highs) is reflecting the soon-to-be implemented “tapering” program while the DXY’s conspicuous weakness late last week (in the face of the new highs in yields) is reflecting an economy that is already weakening prior to the Fed’s first “taper” taking place.
Why do the analysts feel that way? The tapering theory is pretty straight-forward – the Fed has made it clear that they intend to start the tapering program shortly. The evidence of economic slowing, they say, is quite obvious as well, though: a very weak consumer confidence number on Friday; weaker-than-expected manufacturing surveys in the US on Thursday; and, troubling earnings and guidance from Dow components Cisco and Wal-Mart late last week are the most recent data points that could be indicative of a slowdown starting. That slowdown, they note, may be starting prior to the Fed even following through with Dollar one of their tapering plans.
All of that may be a valid analysis, but more than just two days of divergent behavior is needed to confirm this theory’s validity.
What do the technicals tell us?
For weeks, technicians have been calling for a move in the DXY down to around 80.50 – and the DXY is not there yet – but it is not far from the target either. Meanwhile, that same technical crowd has been calling for yields to break through the 2.72% resistance level – which they did last week. The problem short-term is that they had been anticipating the moves in the DXY and yields to correspond better with each other. So, the theory of the DXY forecasting a slowdown may gather more steam if the 80.50 support level on DXY gives way. If that level holds and a rally in DXY occurs (which some technicians say would take DXY up to the 85 – 88 range) you can bet that rates will be soaring simultaneously. The wild card will be the economic and earnings guidance data flow. Will it force rates and the DXY higher or lower? The other wild card (or Trump Card) will be the Fed itself. With FOMC minutes and the annual Jackson Hole Symposium looming, you can bet that the Fed speculation / chatter will be a major factor in trading across all asset classes this week.
Analysts are divided as to the causes of the divergence
Some analysts have already come out and noted that the bond market (with its dropping prices and rising yields – yields that made new short-term highs) is reflecting the soon-to-be implemented “tapering” program while the DXY’s conspicuous weakness late last week (in the face of the new highs in yields) is reflecting an economy that is already weakening prior to the Fed’s first “taper” taking place.
Why do the analysts feel that way? The tapering theory is pretty straight-forward – the Fed has made it clear that they intend to start the tapering program shortly. The evidence of economic slowing, they say, is quite obvious as well, though: a very weak consumer confidence number on Friday; weaker-than-expected manufacturing surveys in the US on Thursday; and, troubling earnings and guidance from Dow components Cisco and Wal-Mart late last week are the most recent data points that could be indicative of a slowdown starting. That slowdown, they note, may be starting prior to the Fed even following through with Dollar one of their tapering plans.
All of that may be a valid analysis, but more than just two days of divergent behavior is needed to confirm this theory’s validity.
What do the technicals tell us?
For weeks, technicians have been calling for a move in the DXY down to around 80.50 – and the DXY is not there yet – but it is not far from the target either. Meanwhile, that same technical crowd has been calling for yields to break through the 2.72% resistance level – which they did last week. The problem short-term is that they had been anticipating the moves in the DXY and yields to correspond better with each other. So, the theory of the DXY forecasting a slowdown may gather more steam if the 80.50 support level on DXY gives way. If that level holds and a rally in DXY occurs (which some technicians say would take DXY up to the 85 – 88 range) you can bet that rates will be soaring simultaneously. The wild card will be the economic and earnings guidance data flow. Will it force rates and the DXY higher or lower? The other wild card (or Trump Card) will be the Fed itself. With FOMC minutes and the annual Jackson Hole Symposium looming, you can bet that the Fed speculation / chatter will be a major factor in trading across all asset classes this week.