From Nic Lenoir of ICAP
EURCHF has been making all time lows, and so it did get one meager headline on Bloomberg but it wasn't exactly the talk of the town. However, the attached chart shows that EURCHF selling off implies that something bad is brewing for sovereign bonds in Europe. The chart represents the EURCHF against the spread between the 2Y average sovereign yield (weighted by notional outstanding) and the 2Y EONIA which is 2Y compounded overnight rate. One can see fairly quickly that over the past couple 18 months one rarely goes without the other. Practically it just means that whenever money is flying out of Euro into Swiss Franc it's highly likely that people (the same people) are getting rid of their Eurozone sovereign bonds. This is not the widest divergence we have seen but the EURCHF is breaking out lower, and with reports that last week's purchases of Eurozone bonds by the ECB was the lowest since the beginning of November it is not crazy to expect renewed selling pressure to manifest shortly.
I have attached again my DXY chart. The 60-dma has been an excellent envelop for the price action over the last 2 years. The higher order envelop is the 200-dma, which we first tested and rejected at the end of November. There is a chance we correct again slightly to retest the 60-dma first (currently at 78.48) but after that it really looks like a beautiful bullish set-up and we shall pierce through the 200-dma and make a whole lot of carry traders very uncomfortable. Surely if we are to believe EURCHF that Eurozone bonds are about to get sold hard again shortly, it is easy to imagine the USD would rally on the back of that dynamic. Remember also that the new tea-party elected representatives are hitting Washington in January led yb Ron Paul and we can expect some much more sobering speech extracts than the taxcut and benefit extension bonanza we were served for the holidays.
I am very open to the idea of being wrong, but a lot of the markets I track point towards a strong USD. Surely we shall know with the moving averages turning. USDCAD could be a great indicator. The pair has been in a very narrow and narrowing range for over a year now. Closing below 1.00 on strong volumes in the market would probably send people covering or chasing it lower, but the 100-dma and 200-dma which have held as resistance on a close since August both within less than 1% upside break out levels are just one bad day for risk away...
Good luck trading,