Thoughts on the Price Action

<br /> Thoughts on the Price Action – Marc to Market<br />


The market has not changed its mind.  Following Brainard’s comments
yesterday the market had downgraded the chances, which were already modest, of
a Fed hike next week.  The September Fed funds futures is unchanged on the
day.  The implied yield of 41 bp matches the 50-day moving average.  
Maybe the
suggestion that 25 bp hike in the target range somehow would make the Federal
Reserve imprudent, incautious or impatient is a bit much. 
 Without expectations changing the US 2-year yield is
near 80 bp. It is eight basis points above its 50-day moving average.  The
10-year yield is poking through 1.70%, which is about 18 bp above the 50-day
moving average.     
It is premature
to make a hard conclusion.
  However, investors should be open to
the possibility the sell-off in asset
prices in the US, and especially the backing up of US interest rates and the
steepening of the yields curve may be a
protest against such easy monetary policy in the US.  That hypothesis
seems to be a corollary to the idea that monetary policy in Japan and Europe is maxed out, if not in terms of the lowest rates can go into the phantom-zone below
zero and amount of assets that can be bought,
then as a function of the political will of policymakers.  
The sharp
backing up in yields is not just a function of the US.
  European benchmark 10-year yields
are mostly up 3-5 bp today and 20-25 bp over the past week.  The German
10-year yield is at seven bp, the highest
since Brexit; two months ago it was near minus 30 bp.  The rising bond yields in
Europe not only reduce the amount of negative yielding securities but also increases the universe of assets the ECB can
The 10-year JGB
has trailed a bit.
  It too was near minus 30 bp in July,
but it has only managed to near zero.  The 20-year JGB had almost no yield
two months ago, and it is near 50 bp now.
The US Dollar
Index has been steadily moving higher. 
 We continue to monitor a uptrend
line drawn off the April, June and August lows, which caught the September low
as well.  It comes in near 95.55.  Yesterday and today have been
about consolidation.  The US Dollar Index is trading today within
yesterday’s range, which was within last Friday’s range.   A move above
95.60 is needed to signal another run at 96.00-96.25.  
There is
shorter uptrend in the euro that connects
the July, August, and September lows.
  It is near $1.1170 today.   Today is the also the euro’s second consecutive inside day; coiling, as it were like a spring. Just above
7%, one-month implied volatility is near
the lowest level of the year.  
Sterling is
having a rough day.
  The lack of additional uptick in
consumer prices in the UK, which leaves the headline rate still at its highest
level in a couple of year, has spurred the largest drop in sterling in five
weeks.  Sterling’s drop has pushed
it through a one-month up trendline (since August 15 low) that came in near $1.3210.  A week ago, sterling was bid above $1.34 to approach the
top of its trading range post-referendum.  The subsequent price action
reinforces the importance of upper end of the range.  Sterling drew bids last
time (late-August) near $1.3065.  
The dollar is
firm against the yen, despite the sell-off in stocks, which is often seen a yen-supportive. 
 Perhaps, the rise in US interest rates, which is understood as yen negative, is a more
important consideration at the present.    Also, the outcome of the
BOJ meeting is more uncertain for investors than the FOMC meeting.  Within
a JPY101.20-JPY103.20 range, it is difficult
(for us) to have a strong view of the
near-term price action.  
Rising yields,
falling commodity prices, and perhaps the risk-off mood are punishing the
dollar-bloc currencies.
  We have been looking for a push
toward CAD1.3200, and it is being approached
today. Immediately beyond there is the high from July near CAD1.3250 and the
200-day moving average now around CAD1.3270.   
Since September
6, the US dollar has risen against all the major currencies and the most against the Canadian and Australian
 They have lost 2.4% and 2.9% against
the greenback respectively. The Aussie was trading near $0.7730 as recently as
five days ago.  Today it has approached $0.7440. The fact that it is
beyond the lower Bollinger Band (~$0.7475) warns the shorts ought to be
cautious. Also, the $0.7450 area met the 50% retracement objective of the rally
since late-May.       The 61.8% retracement is found just below
$.7380 and other technical support near $0.7400.  


Thoughts on the Price Action
Thoughts on the Price Action

Reviewed by Marc Chandler

September 13, 2016

Rating: 5

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