The Dollar as the Hot Potato

The Long Bond is way up in the past few days, with yields shooting from 3.95% on Oct2 to 4.2% Friday. The yield curve had been flattening, but is now going the other way. See chart from StockTiming. Bond markets are closed today for Columbus Day Fall Weekend Day. Tomorrow should be interesting. Does this sharp change in bond yields reflect local turmoil last week in forex markets, meaning it will settle back down this week, or is it presaging a trend change in the Dollar?  

Treasury had a surprisingly poor auction on Friday. Perhaps the CBO long term analyses are causing concern, since they point to fiscal doomsday. Curiously, despite last week's sneak attack on the Dollar, it came back on Friday. The Dollar is down today except for a collection of Asian Tigers who have been intervening to devalue their currencies (including Japan). My experience with bond markets is they don't look out that far; instead are driven by the trading environment. That may be about to worsen.

First, central banks are worried over holding the hot potato: too many Dollar holdings when the bottom drops out of it. While central banks are not decreasing USD holdings, they are shifting proportionately away. In effect, central banks are shorting the Dollar. Why?

No one wants to be caught holding too many dollars, and this rising reluctance is increasing pressure on the USD. This is an obvious USD negative, but it is also means that the ECB and the EUR are caught between a rock and a hard place. The capital flows into the EUR have very little to do with any euro area cyclical dynamism.. 

Second, we seem to be in a swirl of events that may soon change the current market dynamic. Besides Latvia having a failed auction and potentially defaulting, now Romania may collapse tomorrow. Fear of fiscal dominoes is bullish on the Dollar as a safer haven.

Third, the other shoe to soon drop may be China. The Shanghai exchange had been closed for over a week, opened strong Friday and faded today. Nw a report is out that lending in China hit a new low in September. From the report: "Yet the September decline was doubly ominous, as it comes in a time when banks traditionally let the spigot on full blast." 

Comments

[Jing Chen]

Thanks Yelnick.

US Dollar index may have bottomed on Thursday:

http://www.marketwatch.com/investing/index/DXY

If you go to the above chart and select 5-Day view, you will see the sharp 5-wave down on Wed/Thursday, followed by a sharp 5-wave rise into Friday. You will then see this 5-wave rise being corrected into today.

I am sure there are other ways to interpret this wave pattern, but it seems to me the most likely count is the USD bottom scenario.

Speaking of Central Banks, they are so conservative that they are always a great contrarian indicator. Their bearishness on USD would be welcome news at this moment.

[Newbietrader]

I guess today wasn't the game, set, match, take it to the bank sell off.......