Positioning And Momentum Trump Interest Rate Considerations

The US 10-year yield fell last week to its lowest level in three months, and the weekly decline was one of the largest in the past year (SPTL).  The implied yield of the December 2022 Eurodollar futures contract slipped to almost 33 bp, the lowest level in nearly four months.  The yield has drifted lower for the fourth consecutive week.  It has risen in only two weeks since the end of March.  Three-month LIBOR fell to a new record low.

 Yet, the dollar proved fairly resilient to these latest interest rate developments. It rose against nearly all the major currencies, helped by a bout of short-covering ahead of the weekend.  Part of the decoupling may be traced to speculation that the Federal Reserve could signal its intention to begin to talk about tapering.  In addition, key chart levels, like $1.22 in the euro, $1.42 in sterling, $0.7800 for the Australian dollar, and the JPY110 and CAD1.20 levels largely held, which may have encouraged some momentum traders to move to the sideline.  Lastly, we have been tracking the deterioration of the foreign currencies' technical tone, even while recognizing that the heaviness of US interest rates may deny it much upside traction.  The broad sideways movement is alleviating the over-extended technical readings after the greenback trended lower in April and May.  

Dollar Index:  The Dollar Index set new highs for the week ahead of the weekend near 90.40, near the upper Bollinger Band (set two standard deviations above the 20-day moving average.  The last time the Dollar Index traded above the upper Bollinger Band was on March 31, when it peaked at around 93.45.  The high before the employment data was a little above 90.60.  The Dollar Index has been confined to around 100 points (~89.60-90.60).  The MACD continues to trend higher, while the Slow Stochastic has leveled out in the middle of its range.  The five-day moving average crossed above the 20-day moving average at the start of last week for the first time since April 9, which also illustrates the easing of the dollar's downside momentum.   While the 90.60 area offers resistance, additional gains toward 91.00 would still be consistent with the consolidative phase (UUP). 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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