by Jay Norris
What is bearish here for the European majors is that U.S. Bonds are up over a full point today or $1,000 face value and EUR is little changed, while GBP is lower on the day by over 50 pips. That is a divergence that cannot be overlooked, and could be telling us that the Dollar is leading Bonds. Below is a daily chart of EUR and the 30-year Bond future.
Charts courtesy of eSignal
In Sept of this year the greenback failed to rally on price breaks in Bonds, while the Euro skied. The significance of this is that when Bonds break, interest rates go up. If the Dollar could not rally on market-induced rate up-ticks on the long-end, what news would it rally on? Indeed we saw a nasty Dollar sell-off from September right up until Thanksgiving. Currently the relationship between higher rates on the long end and up-ticks in the Dollar has resumed, meaning that the previous relationship has flipped, with the European currencies actually weakening today on the up-tick in Bonds which equates to a downtick for long-term U.S. rates. Holiday markets or not, we have action here that warrants monitoring.
Of course this current action has come on lower volume, but does beg the question: What happens to the European currencies if U.S. Treasuriesâ€™ rates indeed up-tick? My experience tells me that they will go lower as a more normalized relationship between U.S. Bonds and the U.S. Dollar resumes. Weâ€™ll likely have to wait until â€™08 gets rolling for confirmation, but we could see a symmetrical relationship between U.S. Bonds and the European-based currencies, much as we had a symmetrical relationship between U.S. stock indices and the carry trade.
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