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20 Aug 2013
The DXY shuffles sideways for 2nd day even as Treasury yields rip
FXstreet.com (Barcelona) - The divergence between soaring yields and a flattish DXY continues to catch the attention of analysts and traders as gaming the movements of each is critical for all asset classes.
Analysts are now assigning “trading phenomenon” as a label for rising yields
Yesterday, analysts were speculating that, between the two, the DXY was telling the truth about the current state of affairs in the US more so than Treasury yields. The greenback is hinting at some coming weakness in the US economy and/or markets. Meanwhile, under “normal” market conditions, the interpretation of the breakout in yields would be that the economy is accelerating big time. With recent US data coming in on the sketchy side (witness the manufacturing and consumer sentiment last week), it is easy to see why those analysts side with the more skeptical viewpoint.
So, why are yields rising as they are? The answer is either that the skeptics are completely wrong and things ARE getting better or this is purely a squeeze being put on very heavy long positions. It is well known that major institutional bond players like Bill Gross’ PIMCO Investments had planted the bond bulls’ flag right at around the previous resistance in yields at 2.72%. They even came out and told investors to “ride the storm out” on the thus-far erroneous position. When trades are wrong and getting more wrong by the minute, things can get pretty painful for those on the losing side. While Bill Gross and his PIMCO associates may be liquid enough to “ride out the storm”, not everyone is and you can bet there was major leverage used in some of those long positions (by both speculators and managers trying to boost portfolio yields). So, this breakout and consolidation may be a clean case of “long squeezing” going on in bonds.
What’s the technical picture looking like for bond yields and the DXY?
Technicians are still calling for a move lower in the DXY to around the 80.50 area before a fairly substantial up move to 85 – 88 is expected. Meanwhile, yields appear to be in wave 5 of 5 higher with an upside target (for the 10-year Treasury) of 2.963%. After that, a corrective move lower in yields could play out and could take the 10-year yield down to 2.59%. 2.47% or 2.37%. So, maybe we see another day or two oh higher yields (to get up to the 2.963% target) and then a simultaneous downside correction in both yields and the DXY (the remaining downside correction there). Then, perhaps we’ll see a resumption of higher yields along with the strength in the DXY that is lacking this time around.
Analysts are now assigning “trading phenomenon” as a label for rising yields
Yesterday, analysts were speculating that, between the two, the DXY was telling the truth about the current state of affairs in the US more so than Treasury yields. The greenback is hinting at some coming weakness in the US economy and/or markets. Meanwhile, under “normal” market conditions, the interpretation of the breakout in yields would be that the economy is accelerating big time. With recent US data coming in on the sketchy side (witness the manufacturing and consumer sentiment last week), it is easy to see why those analysts side with the more skeptical viewpoint.
So, why are yields rising as they are? The answer is either that the skeptics are completely wrong and things ARE getting better or this is purely a squeeze being put on very heavy long positions. It is well known that major institutional bond players like Bill Gross’ PIMCO Investments had planted the bond bulls’ flag right at around the previous resistance in yields at 2.72%. They even came out and told investors to “ride the storm out” on the thus-far erroneous position. When trades are wrong and getting more wrong by the minute, things can get pretty painful for those on the losing side. While Bill Gross and his PIMCO associates may be liquid enough to “ride out the storm”, not everyone is and you can bet there was major leverage used in some of those long positions (by both speculators and managers trying to boost portfolio yields). So, this breakout and consolidation may be a clean case of “long squeezing” going on in bonds.
What’s the technical picture looking like for bond yields and the DXY?
Technicians are still calling for a move lower in the DXY to around the 80.50 area before a fairly substantial up move to 85 – 88 is expected. Meanwhile, yields appear to be in wave 5 of 5 higher with an upside target (for the 10-year Treasury) of 2.963%. After that, a corrective move lower in yields could play out and could take the 10-year yield down to 2.59%. 2.47% or 2.37%. So, maybe we see another day or two oh higher yields (to get up to the 2.963% target) and then a simultaneous downside correction in both yields and the DXY (the remaining downside correction there). Then, perhaps we’ll see a resumption of higher yields along with the strength in the DXY that is lacking this time around.