Just when it looked safe to go swimming the sharks returned ! The USD showed signs of life at the end of last week with the USD index (DXY) breaking the key technical 91.90.. 52 week low.. only to aggressively bounce and trade above it most of this week. That changed overnight with a decisive break lower. Its a very bearish technical break and the sharks know it ! Yes we had an ECB meeting overnight that didnt help the USD’s cause but its not entirely to blame. The root cause lies in US Treasury Yields. US 10yr Yields overnight traded down to 2% and lows not seen since Nov last year .
Treasury yields have been hammered for quite a few reasons. Obviously safe haven flows from North Korean tensions the obvious cause however there are quite a few domestic reasons in the US. The recent Hurricanes in Texas and impending one in Florida this weekend have a huge damage bill that is weighing. Its also driven up jobless claims in a big way as evidenced by this weeks data. The debt ceiling being kicked down the road to Dec also has the market pricing out a Dec hike with the possibility of a government shutdown. The speculation re the next Fed chair is also weighing . Market knows Trump’s agenda is to support manufacturers and wants to keep ultra loose monetary policy. He will appoint a dove. This wont help yields or the USD. A recent banks study put Trumps performance in office so far as a -30bps hit to Treasury Yields.
Chart below shows the trend in yields and it isnt pretty! The USD cant rally with yields falling out of bed. What the chart does show is where to expect some good support in yields and also a point where the USD may get support or even bounce. Its clear that yields can test the bottom of the trend channel down towards 1.9%. Yields should base off here and help support the USD. A break of the channel however would be extremely bearish and the USD sharks would be in a feeding frenzy !