Analys från DailyFX
Yields Surge as S&P Tumbles
Summary: US Treasury Yields have surged as the SP 500 has tumbled, and we think this has significant implications for the US Dollar. Why?
Earlier this month our Senior Market Strategist wrote an excellent article on the significance of the “Bond Bubble”, and it was prescient—we’re currently seeing an unwind of massive bets on bond markets.
To summarize the argument: unprecedented Quantitative Easing from the US Federal Reserve and global central banks drove record capital flows to bond markets and built a massive bubble. The unwind can and likely will have far-reaching effects across financial markets.
Why is this such a big deal? Let’s look at recent price action in US Government Treasury Yields and the SP 500. Higher yields mean lower prices in bonds, and the fact that the 10-year US T-Note Yield saw its largest single-week surge in a decade is a very big deal. The SP 500 simultaneously tumbled.
Treasury Yields are Surging as SP 500 Tumbles – That’s NOT SUPPOSED TO Happen
Data source: Bloomberg, Chart Source: R
Here’s why this isn’t supposed to be happening: the US Treasury Bond/Note/Bill is theoretically the world’s safest benchmark asset, and it’s historically done well in times of financial market turbulence. The fact that it isn’t shows that this is quite likely the Bond Bubble burst we’re long feared.
A financial market panic could follow, and it would signal an indiscriminate unwind of leveraged instruments across the board. Or in plain English: what’s gone up will come down.
It’s helpful to take a look at financial market volatility prices as another key reason why things could get far worse before they get better.
Forex and SP 500 Volatility Prices have Surged, but Could go Far Higher
Data source: Bloomberg, CBOE; Calculations: DailyFX; Chart Source: R
Why are the bond bubble and forex/SP 500 volatility prices so critical to the US Dollar?
Put simply, volatility prices serve as an excellent proxy to investor fear. (That’s why the SP 500 VIX is also known as the ‘Fear Index’) If they’re headed sharply higher, it could signal the start of a massive market deleveraging.
The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) trades near its highest since 2010 as our DailyFX 1-Month Volatility Index is only at its highest since mid-2012. Its longer-term correlation suggests that, all else remaining equal, the USDOLLAR ‘should’ be higher.
Dow Jones FXCM Dollar Index (ticker: USDOLLAR) has Surged as Forex Volatility Prices Rise
Data source: Bloomberg; Calculations: DailyFX; Chart Source: R
Record-low interest rates in the US have made the Dollar an investor favorite to fund trades in other markets. i.e. many have borrowed in USD to buy the SP 500 and other speculative assets. If those trades are unwound, the Dollar could surge.
I wrote yesterday of trading strategies I think will do well in highly volatile markets. I’ll continue updating changes to conditions via my regular reports—follow future updates via my e-mail distribution list and intraday via Twitter.
Forex Correlations Summary
View forex correlations to the SP 500, SP Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.
Data source: Bloomberg. Chart source: R
SEE GUIDE ON READING THE ABOVE CHART
— Written by David Rodriguez, Quantitative Strategist for DailyFX.com
Receive future special reports on the Australian Dollar and other studies via this author’s e-mail distribution list with this link.
David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.Contact and follow David via Twitter: https://twitter.com/DRodriguezFX
What’s inside:
- EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
- Resistance in vicinity of 11825/80 likely to keep a lid on further strength
- Targeting the low to mid-11600s with more selling
Confidence is essential to successful trading, see this new guide – ’Building Confidence in Trading’.
Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.
Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).
Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.
For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.
EURUSD: Daily
—Written by Paul Robinson, Market Analyst
You can receive Paul’s analysis directly via email bysigning up here.
You can follow Paul on Twitter at@PaulRobinonFX.
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
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