The warning in the bond market rally
The market consensus is for more USD weakness but we are seeing some strength so are we going to see it continue to firm or will we see the longer-term downtrend continue? Our view is the market is too bearish on the USD going forward and we think it has limited downside from here and will mount a major upside rally.
If the USD does mount a broad-based rally a currency that would be hit hard would be the AUD – Our views of the key technical levels in AUD/USD are also outlined below but first why is the market so bearish of the USD?
The Fed is expanding its balance sheet and with Joe Biden and the Democrats about to come into Government large fiscal spending can be expected. The huge stimulus and the fact that interest rates are low points to more USD weakness going forward.
The huge fiscal stimulus is actually the reason the USD could rally. Bond traders are concluding that more Government spending means bigger deficits, more [Treasury] supply which will push interest rates higher. In the Bond markets.10-year Treasury yields are up above and clear of the psychological 1% level and are moving higher as per the chart below. As US bond yields rise they become more attractive to investors and money flows in Fixed Interest markets which will firm the USD.
T NOTE 10 YEAR NOTE: After grinding higher from October this month we have made a clear break of the psychological 1% level and we are now accelerating away to the upside and expect more strength to support the USD.
In terms of 5 year yields the USD is oversold as we can see on the chart below of the US Dollar Index tracked against the 5 year Yield:
“The last time the USD was so weak it was also falling despite supportive rate moves and it reversed all of the fall quickly” (Societe Generale)
We have rising yields which if they continue higher will support the USD and we also have the market heavily short the USD and there holding there biggest short position since 2011 on the chart below from CITBANK:
The market is as we noted looking for more USD weakness but Bond yields rising and the fact the market is so heavily short the USD points to limited downside in the short term and warns of a major correction to the upside.
The Australian Dollar
The Aussie has been one of the majors which has benefited the most from USD weakness but if the USD mounts a rally it will be hit hard and we have outlined the key technical levels to look out for on the chart below.
AUD/USD DAILY CHART: The AUD has come back from the 0.7800 level and any rallies are expected to fail back to the level. A break of nearby support and the 20 Day MA (Green Line) could set up moves to major support levels at 0.7400 and 0.7200.
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