The Baker Group

Treasuries Finish Flat: Treasuries ended the day little changed as traders await tomorrow's FOMC meeting. There is no changed expected from the Fed's current course of action, but participants will be parsing the words of the Statement as well as Fed Chairman Ben Bernanke's testimony. This morning's housing starts (914K actual v. 950K expected) and building permits (974K actual v. 983K expected) both fell short of estimates while CPI posted an in-line 0.2% advance. The complex saw light selling ahead of the data, but buyers were in charge for the remainder of the day as action settled little changed. The benchmark 10-yr yield ticked up to almost 2.22% immediately following the data, but managed to slip to 2.182% by the cash close. Today's settlement was 5 bps off last week's 14-month high. Slight outperformance from the long bond pushed its yield down less than 1 bp to 3.342%. Slight flattening developed along the yield curve as the 2-10-yr spread narrowed to 190.5 bps. Elsewhere, precious metals remained under pressure as gold fell $16 to $1367 and silver slipped $0.15 to near $21.60. Wednesday's data is limited to the weekly MBA Mortgage Index (7:30) with the main event being the FOMC rate decision, release of economic projections (14), and Fed Chairman Ben Bernanke's press conference (14:30).


 

Dollar Slides Ahead of Tomorrow's FOMC Meeting: The Dollar Index jumped into positive territory following this morning's data as action tested the 81.00 level, but quickly reversed into the red as equity markets opened up with gains and continued climbing. Action sank to session lows near 80.60, and has held there throughout the afternoon as traders await tomorrow's FOMC meeting. 

• EURUSD is +45 pips at 1.3405 as trade looks to post its best close in four months. The single currency continues to shrug off potential headwinds from Greece, as well as today's report Cyprus is looking to alter the terms of its bailout. Near-term support remains near 1.3200 while a run above the 1.3450/1.3500 area puts the February high (1.3700) in focus.
• GBPUSD is -65 pips at 1.5650 as trade has managed to claw back a majority of its early losses. Sterling sank to a one-week low of 1.5565 as a result of this morning's data, but steady buying has persisted over the course of U.S. trade. The bid developed after the pair was able to hold support in the 1.5550 area with action now climbing back towards the 200-day moving average (1.5695). The minutes from Mervyn King's final Bank of England meeting will be released tomorrow.
• USDCHF is -35 pips at .9190 as trade probes the .9200 support level. Today's weakness has action on track to close at a four-month low as bulls remain unable to take control. Swiss ZEW Economic Expectations will be announced tomorrow.
• USDJPY is +55 pips at 95.20 as trade ticks higher for a second session. Buying has developed despite German Chancellor Angela Merkel providing some pushback against the impact Japan's policies have had on foreign exchange. Early buying failed at the 96.00 resistance level, but tomorrow's session will still give the pair a chance for its first three-day winning streak in over a month. Japan's trade balance is due out tonight.
• AUDUSD is -50 pips at .9500 as sellers remain in control. The hard currency is lower for a third straight session, and has now erased almost all of Thursday's surge. Earlier selling pressured 33-month lows, but so far the .9450 level has held. Australia's CB Leading Index will cross the wires this evening.
• USDCAD is +10 pips at 1.0200 as trade remains trapped between the 50- and 100-day moving averages. Look for the pair to test the 1.0275 region if it is able to climb above the 50-day moving average (1.0205). Canadian data is limited to wholesale sales. Bank of Canada Governor Stephen Poloz will speak in Oakville, Canada.

 

Afternoon Update: 2-yr unch @ 99 30/32...3-yr unch @ 100 01/32...5-yr +01/32 @ 99 23/32...7-yr +01/32 @ 98 24/32...10-yr unch @ 96 04/32...30-yr +07/32 @ 91 06/32...EURUSD +45 pips @ 1.3405...GBPUSD -70 pips @ 1.5645...USDJPY +55 pips @ 95.20...USDCHF -40 pips @ .9185...AUDUSD -40 pips @ .9510...USDCAD +10 pips @ 1.0195
 

Treasuries Drift Ahead of Tomorrow's FOMC Meeting: Treasuries drift in a tight range as trade bears the noon hour. Maturities across the complex hover little changed as traders await tomorrow's FOMC meeting that many predict will provide more clues on whether or not a tapering of the QE program will begin in the coming months. Light selling has the benchmark 10-yr yield up less than 2 bps at 2.189% as action lingers near 14-month highs. Curve steepening continues with the 2-10-yr spread wider at 192 bps. Meanwhile, precious metals are near their lows with gold $20 at $1363 and silver off $0.20 near $21.55.
 

Dollar Remains Below 81 Ahead of Fed: The Dollar Index continues to roll around in the 80.50-81.00 area ahead of tomorrow's Fed meeting. The DXY was trading at 80.81 ahead of the release of the latest CPI, permits, and starts numbers. The housing data came in below expectations and CPI failed to show any signs of pricing pressure. The initial reaction was for the dollar to decline, but the DXY firmly held the 80.68 level and reversed higher. The DXY would eventually run to 80.99 but it would quickly give up those gains and slide back toward 80.70. The move suggests fast money at play but the key element is the strong support the dollar is seeing at the 80.70 area ahead of the FOMC.

• The euro tested the 1.34 level for the first time since February. The move came during the European trading hours as an improvement in the German ZEW Economic survey helped provide a boost to the single currency. Market focus will slowly turn in the coming sessions as the highly anticipated Fed meeting and PMI data are due out later this week.
• The pound has temporarily lost its battle with the 200 dma (1.5701). Cable had been testing the key level in the prior sessions but slipped back into the 1.5570 territory this morning. Selling pressure in the pound picked up following the release of inflation numbers. The figures remain high, most notably the CPI at 2.2% stands above the BoE target; however, they did show some signs of receding when compared to the April data. The market will await new BoE governor to take control in just under two weeks.
• The yen is finally showing some signs of stabilizing in this 95 area. The currency has been volatile ever since the Abenomics concept broke onto the scene in Fall of 2012. After seeing a reversal of its losses in late May, early June, the yen has stabilized in this 94-95 area. Market focus will remain on the yen as we await tomorrow's Fed news.

 

Treasuries Hold Near Lows: Treasuries hold near their lows as equity markets are seeing modest gains in the opening minutes of trade. Modest selling has yields up close to 3.5 bps across the belly of the curve as the 10-yr yield hovers near 2.210%. Meanwhile, the wings of the curve are outperforming as a 2 bp advance has the 30-yr yield near 3.370%. Flattening is taking place in the knob of the curve as the 10-30-yr spread tightens to 116 bps. Precious metals are back near their lows with gold down $11 at $1372 and silver off $0.05 near $21.70.
 

Data Reaction: Treasuries are seeing some buying following the inline to weaker than expected data. Housing starts (914K actual v. 950K expected) and building permits (974K actual v. 983K expected) both fell short of estimates while CPI posted an in-line 0.2% advance. Maturities across the complex have ticked off session lows, but still remain in negative territory. Light selling has yields up as much as 2.5 bps in the belly of the curve with the benchmark 10-yr yield at 2.195%. A steeper yield curve remains in play with the 2-10-yr spread wider at 192 bps. Elsewhere, precious metals are now mixed with silver up $0.05 near $21.80 and gold off $7 at $1376.
 

European Yields: Yields are higher across Europe as traders move out of the complex following today's data. European auto sales slumped to a 20-yr low, but the data was not all bad as eurozone (30.6 actual v. 29.4 expected) and German (38.5 actual v. 38.2 expected) ZEW Economic Sentiment surveys both topped estimates.  

• German Bunds are seeing light selling pressure run yields up a couple of bps. The benchmark 10-yr yield is higher by 3 bps at 1.550%. German Chancellor Angela Merkel made headlines at the G8 Summit, questioning the new easy money policy in Japan.
• UK Gilts are lower after today's mixed CPI (2.7% YoY actual v. 2.6% YoY expected), PPI input (-0.3% MoM actual v. 0.1% MoM expected), and RPI (3.1% YoY actual v. 3.1% YoY expected) data. A 4 bp advance has the 10-yr yield up at 2.120%, just off a four-month high.
• Spanish Bonos are offered following today's 6- and 12-month bill auctions. The troubled country managed to raise EUR5.04 bln through the sale short-term debt as the 6-month auction drew 0.821% (0.492% previous) and a 3.8x bid/cover (4.7x previous) while the 12-month auction saw 1.395% (0.994% previous) and a 2.1x bid/cover (2.0x previous). A 2 bp uptick has the benchmark 10-yr yield at 4.595%.
• Italian BTPs are seeing yields in the belly of the curve climb as much as 5 bps as the 10-yr ticks above 4.310%.  

 

Dollar Holds Steady: The Dollar Index holds little changed near 80.80 after spending the majority of overnight trade in negative territory. Bulls continue to watch the 200-day moving average (81.10) as action has spent the last week looking to retake the level.

• EURUSD is +20 pips at 1.3380 after early buying probed the 1.3400 level for the first time since February 20. However, trade has slipped off its best levels of the session after European auto sales fell to a fresh 20-yr low. Action has seen little response to the better than expected eurozone (30.6 actual v. 29.4 expected) and German (38.5 actual v. 38.2 expected) ZEW Economic Sentiment surveys. The 1.3200 area should provide some near-term support.
• GBPUSD is -100 pips at 1.5615 following today's mixed CPI (2.7% YoY actual v. 2.6% YoY expected), PPI input (-0.3% MoM actual v. 0.1% MoM expected), and RPI (3.1% YoY actual v. 3.1% YoY expected). Today's weakness has erased five days of gains for sterling as action slides off the 200-day moving average (1.5695). The 1.5500/1.5550 region is home to near-term support.
• USDCHF is -20 pips at .9205 as trade continues to pressure key support in the area. A breakdown of the level puts the February low near .9100 in jeopardy.
• USDJPY is +65 pips at 95.30 as trade holds just off the highs. Overnight, at the G8 conference, German Chancellor Angela Merkel pushed back against the new easy money policy of Japan, commenting on the impact on foreign exchange. Near-term resistance near 96.00 with the 100-day moving average (96.75) providing an additional ceiling just above the level.
• AUDUSD is -100 pips at .9450 as trade falls back onto the recent lows. The selling comes after the latest Reserve Bank of Australia minutes suggested tame inflation leaves open the scope for further rate cuts. Traders will be watching the .9400 area closely with a breakdown leading to the lowest print since September 2010. USDCNY ticked up to 6.1288.
• USDCAD is +25 pips at 1.0210 as trade holds on session highs. Today's bid has the pair probing the 50-day moving average with a run through the level likely leading to a test of the 1.0260 area.      

 

Treasuries Slip in Early Trade: Treasuries have slipped into the red as early gains have turned to losses. Overnight, President Obama commented that Fed Chairman Ben Bernanke has 'stayed a lot longer' than he wanted, paving the way for what looks like the Chairman's exit when his term expires in January. Light selling has taken hold across the complex with maturities off just a couple of ticks. Today's backup in yields has the benchmark 10-yr testing the 2.200% threshold. Slight steepening persists along the yield curve with the 2-10-yr spread widening to 192 bps. Elsewhere, precious metals are on their lows with gold down $6 at $1377 and silver off $0.05 near $21.70. Data will see CPI, core CPI, housing starts, and building permits (8:30).


 

Treasuries Slide on Tapering Talk: Treasuries ended on session lows after a FT article suggested the FOMC will likely signal tapering at this week's meeting, but any change in its asset purchase program will be dependent on economic data. Maturities across the complex held small gains ahead of U.S. trade, but slipped back to their respective flat lines following the stronger than anticipated NY Empire Manufacturing survey (7.84 actual v. 0.8 expected) and NAHB Housing Market Index (52 actual v. 45 expected). Treasuries hovered little changed throughout the rest of the session until a rash of afternoon selling dropped maturities onto their lows. Shortly thereafter the FT story was released with yields pressing their highs into the close. Selling weighed heaviest on the long end as an advance of more than 5 bps ran the 30-yr yield up to 3.348%. Elsewhere, the benchmark 10-yr yield climbed 4.5 bps on the session, ending at 2.171%, erasing all of Friday's move. Curve steepening developed as the 2-10-yr spread widened to 191 bps. Elsewhere, precious metals were weak with gold falling $5 to $1382 and silver slipping $0.20 near $21.75. Tuesday will see CPI, core CPI, housing starts, and building permits (8:30).


 

Dollar Climbs on Tapering Talk: The Dollar Index jumped to its best levels of the session near 80.90 after a FT headline crossed indicating Fed Chairman Ben Bernanke will likely signal tapering at this week's FOMC meeting; however, any such move will likely be dependent on economic data. Of course this is nothing new as speculation of some sort of tightening has been growing in recent weeks. 

• EURUSD is -15 pips at 1.3330 as trade holds just off the lows. Today's selling has pushed the pair off four-month highs and has traders looking towards 1.3200 support. Eurozone data is limited to ZEW Economic Sentiment and German ZEW Economic Sentiment. ECB head Mario Draghi will speak at the Bank of Israel.
• GBPUSD is -5 pips at 1.5695 as action ligers near the best levels since mid-February. Recent trade has stalled at current levels as bears step in to defend the 200-day moving average. British data includes CPI, PPI input, and the Inflation Report hearings.
• USDCHF is +50 pips at .9260 with today's gains putting the pair on track to close at a one-week high. The pair was able to withstand an early test of .9200 support, and is now looking to make a run at the 200-day moving average (.9345).
• USDJPY is +110 pips at 95.15 with recent buying running the pair to its best levels of the session. The 96.00 area will be tracked closely in the days ahead as bulls look to regain resistance in the vicinity.
• AUDUSD is -35 pips at .9530 as trade holds on session lows after giving up its early gains. The hard currency tested the .9650 level, but ran into a wall of resistance as sellers were able to regain the upper hand. Every attempt at a rally has been met with fierce selling, and now bulls must be able to withstand a potential retest of the .9450 area. The latest Reserve Bank of Australia minutes will be released tonight.
• USDCAD is +25 pips at 1.0195 as action has reclaimed the 100-day moving average. Today's advance comes after Canada's latest foreign securities purchases surged to $14.91 bln ($0.96 bln previous), well above the $4.59 bln that had been anticipated. Current levels will be followed closely as the 50-day moving average lurks in the vicinity.