USD Commentary

Our detailed commentary from last week both before and after the FOMC statement on Wednesday noted that we believe that the Fed’s comments would lead to USD strength in coming weeks. So far our theory has been tested as USD has fallen to levels that printed before the FOMC statement. EUR/USD is trading at 1.4110, USD/JPY at 96.11, and importantly GBP/USD cracked through the 1.6725 level. So we are on guard for any further USD weakness as we think we are at levels that could cause a long-covering push lower on USD (meaning higher EUR/USD and GBP/USD).

Lets not forget that our post FOMC statement theory of stronger USD is a long-term plan. If EUR/USD closes the week significantly higher that the 1.4100 level……and if GBP/USD can regain and hold the 1.6700 levels, then we may have to re-assess our strong USD expectations for the next few weeks. But for now we keep our strong USD plan in place.

Another challenge to our strong post FOMC strong USD theory is that the movement in the US 10 year note seems to have already made its large move. The US 10 year note yielded just above 4.00% about three weeks ago and is now hovering around the 3.5% level. As we noted last week, that is a huge move in a short time period.

We think the yield on the US 10 year note will have to break below 3.50% for much further USD strength. 3.50% is an important psychological level, yet we are seeing and hearing more and more commentary about rates moving towards the 3.00% level. This does conflict with our view of the 10 year yields by years end (we think higher), but with the extremely volatile trading of the 10 year note in the last 12 months, its possible we will see lower rates in the short term and then a move higher towards the end of the year.

This is the stuff we love about the global capital markets; they are like a spider web. If you pull on one corner of a spider’s web, then rest of the web has to shift to accommodate the external action. But the web does not move in a linear manner, the web’s movements depend on so many factors that it is never easy to determine which shape the web will have in the future.