US treasuries hold the key to trading this week

First of all may I say a huge thanks to all of you who managed to come along to Saturday’s presentation at the Traders Expo, cheerfully foregoing the delights of barbecues and the Grand National.  Your sacrifice was much appreciated!  One of the main points in my presentation about transactional trading was the impact of the FED’s policy on the bond market, an apposite topic given this week’s fundamental news.

This week sees the auction of a further $66bn of US treasuries and, as a result, we could well see the markets reach a potential tipping point.  In the last few weeks the focus of attention, in the bond market, has been towards the short end of the curve as both the UK and Europe signalled potential interest rate rises with the ECB claiming first bragging rights with an 0.25 basis point rise, with tomorrow seeing the sale of $32bn of 3 year treasuries.  However, it is Thursday’s $13bn sale of 30 year bonds which is likely to spark more interest given their sensitivity to inflation expectations.  In addition this week the US is also set to release its March consumer price data and, as a result, bond bidders may be reluctant to buy ahead of this report.   Furthermore, data from the CME for the week ending April 5th suggests that speculative net short positions in the 30 year treasury have more than doubled and a quick look at the long bond yield chart shows it close to breaching multi year resistance at around 4.8%.  So what does this mean for traders?

The ramifications for traders are many and varied but to focus on a few the place to start is, as always, the US dollar.  The technical picture for the dollar on the dollar index remains very weak and, as I pointed out on Saturday, any move below the 75 area is likely to signal further sustained weakness, particularly if we breach the 74 price point in the next few days which now seems increasingly likely and any move below here will send the index lower still to re-test the lows of 2008 at 70.79.  With further dollar weakness comes higher commodity prices adding further pressure to the inflation bubble which is now in the process of being created, especially in emerging markets and the BRICS (Brazil, Russia, India and China).  Indeed this week also sees a highly significant meeting in China of these countries who will also be joined by Argentina and Korea.  This group has become so alarmed at the decline of the US dollar that in the last 12 months several of them have agreed extensive swap agreements with China in order to avoid using the US dollar.  So far China has set up swap agreements with Argentina, South Korea, Hong Kong, Indonesia and Malaysia and, as a result, these countries can now use the Chinese Yuan to buy goods and services in China.  In essence it is a club which certificates and coupons have replaced the US dollar and some would suggest its sole objective is to remove the US dollar as the currency of first reserve.  One could suggest it is one of the unintended consequences of last August’s expansion of the FED’s quantitative easing programme.

With further US dollar weakness likely this week which are the pairs to watch?

EURUSD

With the euro dollar having broken above short term resistance in the 1.4376 area last week the pair now seem poised to continue their recent bullish trend and we could even see a re-test of the high of November 2009 at 1.5140 in the medium term.  However, in the short term expect to see the euro dollar push beyond USD1.45 and possibly even towards USD1.4611 with strong support from the underlying moving averages.

GBPUSD

Cable continues to remain bullish, particularly following its move higher on Friday, breaking above short term resistance in the USD1.63 area and here again the move higher is fully supported by the moving averages and we could 1.65 tested should the bond auctions deliver further negative sentiment for the dollar.

AUDUSD

One of the best performing currencies has been the Aussie which continues its upwards momentum, buoyed by the continuing bullish trend in commodities and with a strong platform of support now in place in the 1.02 area we can expect this pair to move higher this week.   The Aussie is also benefiting from speculative net long positions on the Commitment of Traders report with their number having increased by over 7500 contracts in last Friday’s data.  A possible turn for the Aussie (based on my own technical analysis would be in the 1.086) and I will be watching this week’s COT data with great interest. This would also signal a reversal in some commodities.

USDCAD

A very important week for the Canadian dollar which sees an interest rate decision from the BOC, a monetary policy report and conference.  Any hint of an interest rate rise will simply add further downwards pressure to this pair and strengthen the Loonie even further.  Rising oil prices and speculators adding over 15000 long contracts in favour of the Canadian dollar should give us plenty of trading of opportunities this week.

Carry Trade Pitches Dollar to Fresh Lows