Resume the Trend - Jan 25, 2017Submitted by Polar Futures Group on January 25th, 2017
As we wrote last September, we thought the most important trade you had to get right was the USD. See that post here
Now, while the USD is still key, our view has become more centred on the US treasury market. We continue to believe that we are in an environment of rising interest rates, from a multi-decade low reached in July, and a multi-year USD bull market. This turn lower US bonds (prices) started in July 2016, accelerated after the US election, and rates has bounced back since Christmas 2016. Given our view, we are looking to see if the post-Christmas bounce across markets is over. Last fall, as noted in our previous post, US interest rates gave us the first signal, which was followed by Gold and then the USD(as seen against numerous currencies).
We believe that we are starting to see this same sequence that will result in USD strength.
The US 10yr bond prices breaking back below the rising post-Christmas trend line. The 10yr also posted a weekly reversal down last week.
The US 30yr is telling the same story and also had a weekly reversal down last week
After a $90 rally, Gold has also broken lower and was the second market to turn lower last fall. Higher real rates and a strong USD provide big head winds for Gold.
After reaching a new 13 year high at the end of 2016 the USD has softened. We believe the this move lower presents a USD buying opportunity as interest rate moves drive USD strength.
The surge higher in stocks today, along with Dow 20,000 could allow for the move lower in bond prices to continue.
Given what we are seeing in the markets above, we think the headline risk of the Trump administration has created an opportunity. The remarks from both Trump and Mnuchin that the "USD is too strong" may be keeping the USD lower than it should be in the near term and that the moves in interest rates are more powerful and will exert themselves over the medium term. History may not repeat, but it rhymes!