Wall Street has two sides to it, stocks on one side and bonds on the other, and right now the daily march between the two is getting a little tiresome for forex traders. Each day that a direction cannot be found in equity trade equates to a one day up, one day down trading pattern on bonds, and by default the Usd, said TheLFB-Forex.com Trade Team.
Bonds have two sides to them, the note value, and then the yield. As stocks get sold, bonds get bought, and as the note goes up in value the yield goes down, with a lower yield equating to a weaker dollar (the same effect as cutting interest rates). The dollar found buyers during parts of Tuesday trade, or at best negated selling momentum, because of bond yields hitting close to yearly highs.
The issue that many market watchers have is that the Fed has talked a good game of stepping in to instigate growth, but in doing so has increased yields (or rates) to yearly highs with their massive buy-back of Treasury notes. As yet the huge question marks that surround the economic strength that would allow government debt to be repaid in good time, whilst also generating affordable GDP growth, remain unanswered. The fact that the dollar index is still holding support at 84.00 must be a concern to the Fed whilst they are in the middle of trying to de-value the greenback, the Trade Team said.
The markets look to be rejecting Mr Bernanke's call that the economy has weathered the storm, and are happily testing the resolve of anybody wanting to sell the dollar. Hot air from central bankers and administration officials may please the news stations, but the markets run on reality, and right now reality says that it is not time to trust talk, it is time to see walk; at 14:15 EDT on Wednesday the market gets to see the Fed walk.
The U.S. Treasury Secretary has talked up another Usd valuation question mark, and already upset the Chinese government, with claims of currency manipulation on the remenbi, and right now it looks like nothing more than wishful thinking that China will continue to support the purchase of Treasury notes whilst their coffers are full to overflowing with U.S. based debt. That may be something to watch in regard to dollar order flows, there will be no hiding the volume spike if China get involved in dollar valuations via notes and bills.
The markets were not buying dollars in great number on Tuesday, even in the face of weaker equity market trade, but neither were they selling the dollar heavily. We have seen another day of overall sideways movement, with the exception of the swissy and euro. The markets are not holding a strong forex hand right now, and as such will need be get a lucky Flop from the FOMC that lights a fire under things. Looking back, the recent Fed meetings have instigated tit-for-tat jawboning from global central bankers, and have been the swing points that tradable moves have come from.
Overnight Asian trade may be the calm before a strong dollar based storm. Straddling the weakest and strongest pairs may be the answer, and we will signal those on Wednesday morning, The Trade Team said.