While traditionally technicals have been considered voodoo by the vast majority of "legitimate" financial analysts, lately the trend has flipped, and scribbling that one is something as demode as a fundamental analyst tends to generate scowls of disapproval and outright disgust from PMs with a 10 second holding horizon during hedge fund interviews. Which is why looking at the chartist tea leaves, as Goldman's John Noyce has done, suggests that those looking for much more irrational exuberance in bond yields may get their wish, as a double top formation may be forming in 10 Years. The result of a broader double top would likely be an end target of between 2% and 2.2% in the 10 Year, and something potentially as low as 2.84% in the 30 Year, which would probably put all those with TBT exposure in the poor house.
Which of course is horrible news for all those who are still holding on to steepeners on a prayer. Noyce looks at the 2s10s and sees the 200 WMA as a potential target in the current break, meaning we could soon see something as low as 154 bps on the 2s10s as flattening steamrolls over the formerly biggest groupthink trade of the year. And those holding on to hopes of tail end steepening as Morgan Stanley will have you do, may as well abandon all hope: the chart suggests that the 2s30s will go flatter by another 110 bps , or down to 220. How many trading desks will be decimated as a result is unknown.
Extrapolating the rate message into the FX arena likely means that those, such as the BOJ, hoping for a drop in the JPY are in for a long wait. As Noyce says:
Bringing it all together, it’s tough to look for a sustained recovery in USDJPY unless something significant changes with the outlook for yields or well established correlations change
- This chart shows USDJPY spot in blue overlaid with an equally weighted basket of the 10-, 5- and 2-year U.S./Japan yield spreads in green.
- As can be seen the two are very highly correlated from a trend perspective.
- To generate a sustained recovery in USDJPY it would therefore either require a sudden turn in the yield picture, which we don’t really have any concrete signs of as yet, or a significant change in correlations, which it hasn’t paid to look for over recent months.
Yes, chartism is the devil's work, and tends to have a reputation of curve fitting (no pun). However, with few things mattering any more for long-term thesis, now that instantaneous liquidity is of paramount importance and hedge funds actively advertise it, dismiss charts at your own peril.