The persistent bid in U.S. Treasuries has been the subject of debate for many weeks, especially in the FX universe, where up to now, the low yield effect on the dollar has been limited.
The euro, yen, and other majors have remained rangebound in recent sessions, but if longer-term U.S. yields do break lower, will the dollar follow? That is the key question.
This is the flip side of the long-held market argument from the start of 2014, i.e. that the dollar and U.S. yields would rise together on U.S. outperformance as the year progressed.
Traders Monday remained wary of putting on a dollar short or long at current levels, for a variety of reasons.
Arguing against at dollar short, even if U.S. Treasury yields do press lower, given the likelihood that the European Central Bank and Bank of Japan may ease in coming months, if not in the ECB’s case this week, interest rate differentials may stay the same, they said.
In the case of the euro, the closer the pair gets to the 2014 highs near $1.3967, seen March 15 and the psychological $1.4000 mark, seen as a sort of “boing” level for the ECB, the greater likelihood of the central bank easing in some form, they reasoned.
There is also the sense that the currency market already seen the capitulation trade, where dollar longs bailed out. In contrast, the fixed income market, with its long-held Treasury short positions, still has lingering shorts.
Similarly however, traders fretted holding a long dollar position, just in case U.S. yields do see another leg lower.
They would prefer to “buy the dip” in the dollar, in the event that U.S. yields do drag the greenback lower.
FX traders have been watching 10-year Treasury yields closely, noting that these yields have held a 2.60% to 2.80% range mostly since January, with only mild forays outside of that range.
With 10-year yields, at 2.61% Monday afternoon, modestly back inside the range, they were watching to see where yields would close.
While 30-year U.S. Treasury yields have broken some important support levels, major levels for 10-year and five-year yields remained intact, so far, said CitiFX technical analysts in a note.
Key trendlines and the 55-week and 200-week moving averages fall between 2.60% and 2.40% for the 10-year yield, with this area viewed as “formidable” yield support, they said.
“A weekly close below here would certainly require a reassessment of the overall view of higher yields ahead,” the analysts said.
For now however, Citi maintained their view “that we will see yields move higher again as we head through 2014.”
MacNeil Curry, head of global technical strategy at Bank of America-Merrill Lynch, said the “bearish outside bar (a bearish chart pattern indicating further downside) and closing break of the 2.591% range lows” seen Friday in the 10-year yield suggested that lower yields are coming.
“We target the 2.420%/2.399% multi-year pivot zone and potentially below to 2.346%,” he said.
Curry stressed, however, “DON’T FADE THIS BREAKDOWN” and warned that a move back above 2.748% would invalidate the breakdown and point to renewed range trading.
The latest move down in ten-year U.S. Treasury yields “threatens our bullish U.S. dollar index, bullish dollar-Swiss and bearish euro-dollar view,” he noted.
BOAML was “sticking to our guns,” Curry said, adding that a “break below 79.26 (US $ Index), Chf0.8699 (dollar-Swiss) and above $1.3967 (euro)” would force them “to reassess.”
The dollar-index held at 79.49, dollar-Swiss at Chf0.8776 and the euro at $1.3878 Monday afternoon.
Uncertainty, about what the Fed, ECB and BOJ will do in the near-term, has market players adjusting and readjusting their FX calls, even as they lament the low “vol” environment currently being seen.
Of last week’s U.S. non-farm payroll data for April, Barclays strategists said, “Robust private payrolls growth (273k), revisions to previous prints, and a four-tenths drop in the unemployment rate (itself driven by falling participation) fit in line with our house view of growing momentum in the U.S. labor market.”
They cautioned however against “labeling this as the catalyst for a structural move higher in the dollar,” at least, “just yet.”
“Ultimately, the FOMC will be comfortable with the current policy stance until wage-driven inflation shows signs of accelerating, and while our preferred measure of earnings (hourly earnings of production and nonsupervisory employees) is now up 2.3% y/y, progress from the current juncture is likely to be gradual,” the strategists said.
They maintained that “the structural move higher in the dollar is still a H2 story” and noted that “the full retracement of the post-payrolls dollar move within two trading hours suggests the market holds a similar view.”