We have been watching with interest the behaviour of both the USD Index and the US 30 year treasury over the last two months given the weakness of equity and commodity markets. We have been saying for some time that the lack of “bullish” conviction in the USD Index has been a rather telling factor that the “risk aversion trade” would not get far and that the weakness in equity and commodity markets would be shallow. Note what we said on July 10th at thedailytradingreport.com. It now appears that the USD is about to challenge the 78.50 level which is its last line of support before last year’s low at 72. We believe that the USD Index will fall below 78.50 over the coming days and then before year end it will have at least traded below the 72 level.
In support of a falling USD is the failure of the US 30 year to break-out of the down trend that began at the start of the year. From a longer term perspective a breach of the 115 level on the US 30 year opens it up to the 105 level which is a significant movement from current levels. We are reasonably confident that the US 30 year will trade at 105 before year end.
In support of lower US treasuries (and by implication a lower USD Index) is the continued outperformance of non US 10 year govt debt (BWX and PREMX). This suggests that “pure” USD assets are rapidly falling out of favour with international investors (and probably many US investors). If US 10 treasuries are underperforming emerging market 10 years sovereign debt this situation is rather serious
So we continue to position ourselves for a weaker USD and weaker US treasuries. Of course we are not expecting them to go down in a straight-line fashion. It is going to be a bumpy ride but we have time on our side.
We have a number of trades on which reflect our bearish USD and UST stance which we discuss with subscribers.
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