Thursday, March 26, 2015

Fed Gets Dollar Wish; Treasuries (oil) Respond



If the Fed was hopeful that their actions at the March FOMC meeting would bring about a softening of the dollar, they have won that battle.  The dollar has fallen 4.2% from a March 13th high of 100.39 to an overnight low of 96.17.  This dollar weakness may be helping to support crude oil which has recovered 25% from the March 18th (FOMC date) low of 42.03. 

To the extent that dollar strength brought concerns for headwinds against domestic growth, allowing the Fed to postpone normalizing policy, this dollar correction may temper those concerns.  And while the weaker dollar certainly has a hand in strong oil prices lately, I would ask whether if like me, you had become somewhat resigned to the likelihood that oil was on its way to a $20 handle once a new low price traded last week.  I think there was some complacency there as there was in the dollar and there may be with Treasury bulls. 

For USFI, we noted yesterday that some of the contracts had formed a bearish engulfing pattern over the last days.  This was the first bearish development since the last employment report.  Otherwise the technical posture was fairly strong without excessive concerns for short term overbought conditions.  We look with interest today to learn if the bearish reverse is confirmed. 

Open interest rose by 69K in Eurodollars as the yield curve there steepened throughout the first 4 years.  Treasury prices were also modestly lower and the yield curve flattened by just 1 bp between 5’s-30’s.  Open interest was higher in TU 11K, FV 26K, TY 27K and US 10k, but not WN -4K.

An area of strength…or should it be said, ‘the’ area of strength has been labor.  We see claims data shortly and if that indication of employment strength continues its recent trend, we should expect lower Treasury and Eurodollar prices today.  While weaker equity prices yesterday did not seem to deter a move lower in Treasuries, a recovery in Equities today (currently 13 lower S&P) would likely add selling pressure to Treasuries.  




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