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BofA Says Bearish Bonds Means Bullish Greenback

Tyler Durden's picture




 

US Treasuries are breaking out, according to BofAML's Macneil Curry, which is very supportive of the US dollar (especially against the JPY and EM FX). The only caveat, he warns, keep a close eye on fixed income volatility...

 

Via BofAML,

5yr Treasuries are breaking out. This is supportive of the US $ against ¥

US Treasuries yields are on the move, resuming their long term uptrend.

Our focal point for this move is 5yr yields which have broken out from a 1yr range trade and resumed their long term bear trend, targeting 2.025%/2.055% and eventually 2.18%/2.25%.

This should help propel the US $ higher and maintain its long term bull trend.

Looking at a weekly chart of the US $ Index, the trend is on track for long term targets between 89/91, particularly as the weekly ADX is breaking out through 6yr trendline resistance (meaning the trend has further room to run). In the very short term, however, we could see a period of pause in both the US $ bull trend and the advance in treasury yields as 2yr yields are testing a confluence of l/term support at 58.9bps/61.1bps and the US $ Index is testing the Jul'13 highs at 84.75. But we must stress that this should be a temporary pause and ultimately a buying opportunity.

In particular we think that the next bout of US $ strength is likely to come against EM FX.

$/¥ should also continue to appreciate, with a break of 108.95/109.00 exposing 12yr trendline resistance at 109.31 ahead of 110.67 and eventually beyond.

One CAVEAT keep a close eye on FI Vol.

A spike in the MOVE Index could lead to a nasty corrective snap back, albeit a snap back to buy $/¥; especially if 107.49/50 holds.

 

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Thu, 09/18/2014 - 21:27 | 5232407 summerof71
summerof71's picture

Don't these guys have loans to Robosign?

Thu, 09/18/2014 - 21:28 | 5232410 surf0766
surf0766's picture

Charts are meaningless now. Why bother.

Thu, 09/18/2014 - 21:29 | 5232418 SAT 800
SAT 800's picture

Bearish bonds are bullish for the dollar? did they really say this? why does everything look like it came from the National Onion? All day, today, I've been feeling like I took crazy pills as I read this stuff. WTF are they smoking at B of A.? Nevermind, I don't want to know.

Thu, 09/18/2014 - 21:49 | 5232464 himaroid
himaroid's picture

Play em like a fiddle. They were never any good to begin with. They just had a marked deck. Now everyone can see the marks. The speeding Ferrarri has run out of road.

Just know that the game is about the elections.

Thu, 09/18/2014 - 22:05 | 5232507 Dr Strangemember
Dr Strangemember's picture

SAT, just let it go...no need to think so much... yellen & co. have it all under control... just let go and buy stocks, lots of stocks.

Fri, 09/19/2014 - 01:34 | 5232875 SAT 800
SAT 800's picture

You buy the stocks Doc. and I'll watch from the sidelines for the right time to go short. thanks anyway.

Thu, 09/18/2014 - 22:19 | 5232541 Quaderratic Probing
Quaderratic Probing's picture

You sell the bond and they give you USD they have to buy them so they go up.

Fri, 09/19/2014 - 06:38 | 5233101 oudinot
oudinot's picture

As the American treasury bond yields go higher, such that its interest rates are higher than the competition-Germany, England, Canada etc.-then one would buy US treasuries for which they have to buy American dollars.

Hence, the American dollar appreciates.

 

Thu, 09/18/2014 - 21:45 | 5232460 himaroid
himaroid's picture

I will skillfully take the other side of that call. Thanks for the contrary tip mutha fuckas. You assholes are really too easy, here at the end.

Thu, 09/18/2014 - 21:52 | 5232475 FieldingMellish
FieldingMellish's picture

Nothing says strong dollar like having to borrow to pay for your existing debts. Bank(rupt) of America.

Thu, 09/18/2014 - 21:55 | 5232483 delivered
delivered's picture

USD has support for all of the wrong reasons. The Yen is toast (as Japan's economic situation is bleak). The Euro has no support as the ECB is going to have to print and monetize for an extended period (as they really have no choice). EM currencies are poor alternatives as they are too small to handle world currency flows or under too much pressure (think the Ruble in Russia) for other reasons. The Pound may survive today's vote and offer some strenght but not enough of a true world currency to make a difference. The Yuan is an interesting case and slowly but surely will become the world's reserve currency but for now, with the tight capital controls, significant debt problems, and QE being undertaken by the PBoC, it's 15 minutes of fame are still a ways off. 

So this leaves everyone to park their hard earned money in USDs, which combined with rising interest rates (either actual or perceived), the USD bulls are incharge. But make no mistake about it, a rising USD is not what the Fed wants or the US economy can afford for the following reasons:

- Trade imbalance, excluding oil, will only get worse.

- US goods/services sold abroad will become more expensive (thus impacting sales negatively).

- US companies sales and earning's will come under pressure as foreign operations results are translated back into a stronger USD. 

- Rising interest rates will damage the US economy on numerous fronts, especially since so many elements of the economy are leveraged with debt. Residential real estate, already struggling, will most likely not respond well.

- A stronger USD will help keep inflation in check (with imports being cheaper) but with inflation already running well below the Fed's target (and the Fed knowing that inflation is exactly what is needed to help the US manage its enormous debt load), this presents a problem for the Fed.

So what we have is a currency increasing in value by default (as basically every other currency is plagued with some serious problems). Just no other choices really. I know the USD bulls will defend the rise based on real interest rates increasing in the US but this is happening again, for the wrong reasons (i.e., deflation). But since the USD has the least amount of warts on it, there's really no place else that has the size and liquidity to park money right now.

For all of the PM investors at ZH, this will be both a painful period (one in which Gold and Silver will most likely get hammered more days than not) but at the same time, most likely offer the last opportunity to purchase PMs at reasonable values. I suspect that the USD bull market could last for months, if not years, as the world tries to figure out where to go next as let's face it, Europe's, China's, Japan's, and by default, the EM's problems are not going to be solved any time soon.

I would expect that gold will challenge a triple bottom sometime by the end of the year in the high $1,100 range. If it blows through this and takes out $1,100 and then $1,000, the downside could be ugly (into the $800 range) but by then, production will have significantly been curtailed and the price becomes extremely attractive by any standards. So if the tripple bottom doesn't hold, gold (at least priced in USD's) may have a difficult ride for the coming months.

Of course let's remember one critical element in all of this, while the paper price of gold may decrease, physical demand should increase in all of the locals that helplessly watch their currencies devalue on a daily basis. The Japanese really need to take a lesson from India in terms of how gold is used as a store of wealth and protect against government mismanagement. With the Yen stumbling and bumbling on a daily basis, let's just hope some of the Japanese were smart enough to purchase some insurance against a currency that basically has no legs left.

 

Thu, 09/18/2014 - 22:12 | 5232506 himaroid
himaroid's picture

Be good to get some cheap metal. But if the fed wants a weaker dollar, why would they make noise about raising rates? 

But wait, is he still bearish on the long bond? Or just the short end? These fokkers flip flop so much it is hard to keep up.

Fri, 09/19/2014 - 04:11 | 5233001 Wild Theories
Wild Theories's picture

With you on all your points,

"I suspect that the USD bull market could last for months, if not years, "

Looking around the world and at the shape of most major economies, I'm going with years. The world will probably remain murky for the next 4-5 years if not longer.

 

ps. you lost an 'e' on locale...

Thu, 09/18/2014 - 22:20 | 5232547 OMG
OMG's picture

This guy needs copious amounts of occular penetration

Thu, 09/18/2014 - 22:33 | 5232579 himaroid
himaroid's picture

They are stealing from knuks.

Thu, 09/18/2014 - 23:04 | 5232662 Yen Cross
Yen Cross's picture

        Yeah, that strong usd and higher rates are really good for the caugh*caugh* equity markets.

   My guess is that the usd is topping here on the daily chart, and yields are going to start coming back down. (2.66 area for the 10's will tell)

  The Fed. probably loves the higher rates though... They can ponzify everything longer, if rates are rising. I'm still a little perplexed why rates spiked so much off the Fed. announcement. They were already oversold in anticipation of a rate increase. Actually the yield in 10's now, along with this retarded equity market move make bonds (U.S. bonds) look attractive compared to Europe.

  The Australian dollar is also getting ready to short squeeze soon.

Thu, 09/18/2014 - 23:35 | 5232739 sosoome
sosoome's picture

Sounds about right to me; long dollar, short euro, and ahem, short gold.

WAIT! don't pelt me yet. Gold will have it's day, but more blood yet to be squeezed out of it before it does.

Fri, 09/19/2014 - 01:22 | 5232864 Spungo
Spungo's picture

Pullbacks are for pussies. We need to go balls deep into this market.

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