The Week in Review: Yields Rejected at Key Resistance
The Week Ahead
- Treasuries ended mixed amid a choppy trade.
- Friday's bid pushed longer dated yields into the red for the week.
- The Federal Reserve tapered its bond buying program by another $15 bln and announced its purchases will be cut to zero at next month's meeting so long as the economic recovery remains intact. The Statement still contained the 'considerable period' language that many believed would be removed.
- Succession fears subsided on Friday as Scotland voted 'NO' and will remain part of the United Kingdom.
- Global growth concerns caused the Japanese government to downgrade its economic assessment and the People's Bank of China to inject CNY500 bln into the country's five largest banks.
- Economic data was mostly disappointing as industrial production (-0.1% actual v. 0.3% expected), capacity utilization (78.8% actual v. 79.3% expected), CPI (-0.2% actual v. 0.0% expected), housing starts (956K actual v. 1045K expected), building permits (998K actual v. 1054K expected), Philly Fed (22.5 actual v. 23.5 expected) and leading indicators (0.2% actual v. 0.4% expected) all missed estimates.
- Only Empire Manufacturing (27.5 actual v. 16.0 expected) and the NAHB Housing Market Index (59 actual v. 56 expected) beat.
- Up front, the 2Y tacked on +1bp to 0.565%. The yield finished the week near levels last seen in May 2011.
- The 5Y ticked up +1bp to 1.819%. Thursday's selling ran the yield above 1.870% for the first time since July 2011 before slipping into week's end. The 1.750% area provides the first level of support.
- The 10Y eased -2bps to 2.587%. The benchmark yield tested resistance in the 2.650% area, but was unable to reclaim the level that is guarded by the 200 dma.
- A modest bid at the long end dropped the 30Y -4bps to 3.299%. Support near 3.250% is helped by the 50 dma.
- A flatter curve took hold as the 2-10-yr spread narrowed to 202bps and the 5-30-yr spread tightened to 148bps.
- Monday's data is limited to existing home sales (10). KC's George gives opening remarks at the Shift Innovation; Community Development Conference (9:30) and Minny's Kocherlakota discusses "The Objectives of Monetary Policy" (19:30).
- Tuesday will see just the FHFA Housing Price Index (9). Treasury will auction $29 bln 2Y notes. STL's Bullard gives opening remarks at the "Community Banking in the 21st Century" conference (9) before Fed Governor Powell (9:20) and KC's George (9:30) participate over webcast. Later, KC's George discusses the U.S. economy (21:15).
- Data remains slow on Wednesday with the weekly MBA Mortgage Index (7) and new home sales (10). Treasury will hold a $35 bln 5Y note auction. Cleveland's Mester gives her economic outlook (12:15) and Chicago's Evans discusses the economy (13).
- Thursday's data includes initial and continuing claims and durable orders (8:30). Treasury will auction $29 bln 7Y notes. ATL's Lockhart will speak on monetary policy and the economy (13:20).
- Data for the week concludes on Friday as GDP - Third Estimate (8:30) and Michigan Sentiment - Final (9:55) are due out.
Dollar Sees 10th Straight Week of Gains:
- The Dollar Index holds on session highs near 84.70 as trade looks likely to put in its best close since July 2014.
- EURUSD is -70 pips @ 1.2845 as action flirts with 14-month lows. A quiet session in the eurozone has seen trade held hostage by the broad-based dollar strength. ECB head Mario Draghi will speak in Brussels on Monday.
- GBPUSD is -125 pips @ 1.6310 after seeing sharp reversal off the overnight highs. Sterling kissed 1.6525 in early action as it was apparent the majority of Scotland voted 'No' and the country will remain in the United Kingdom. However, sellers emerged in defense of resistance in the area, and has action pressing the lows ahead of the close.
- USDCHF is +60 pips @ .9400 as trade climbs back towards one-year highs. A lack of news and data out of Switzerland has kept the pair closely correlated to the euro.
- USDJPY is +20 pips @ 108.95 as action looks likely to close at a fresh six-year high. The pair neared the 109.50 level in overnight trade after the Japanese government downgraded its economic assessment, but has since surrendered most of those gains.
- AUDUSD is -50 pips @ .8935 as trade dips to a six and a half-month low. The .8900 area remains under close watch as solid support rests in the vicinity.
- USDCAD is +30 pips @ 1.0970 as trade has recovered from its early weakness. The pair probed the 50 and 200 dma before buyers emerged in defense of 1.0900 support following the mixed CPI (0.0% actual v. -0.1% expected) and wholesale sales (-0.3% MoM actual v. 0.8% MoM expected) data.
Afternoon Update: 2Y unch @ 99 27/32...3Y unch @ 99 23/32...5Y +01/32 @ 99 02/32...7Y +03/32 @ 98 04/32...10Y +06/32 @ 98 02/32...30Y +19/32 @ 96 13/32...EURUSD -85 pips @ 1.2830...GBPUSD -140 pips @ 1.6300...USDJPY +20 pips @ 108.95...USDCHF +65 pips @ .9405...AUDUSD -55 pips @ .9830...USDCAD +35 pips @ 1.0975
Yields Struggle at Key Resistance Levels:
- Treasuries are probing session highs thanks to a late-morning rally.
- Recent action has seen yields stall near multi-month highs as sellers take a breather following weeks of selling. Buying is having the biggest impact on the long end of the curve as the 30Y holds -3.8bps @ 3.321%. Today's bid has pushed the yield back below the 100 dma after once again failing near 3.370%. Support in the 3.250% will be watched closely as the 50 dma also lurks in the vicinity.
- The 10Y trades -2.9bps @ 2.600%. Resistance and the 200 dma near 2.650% have presented problems near the July highs. A pullback into the 2.470% area looks possible as the 50 dma helps support at the level.
- The 5Y is -1.7bps @ 1.824%. Should a pullback occur, the yield will look to find support near 1.750%.
- A flatter curve persists as the 2-10-yr spread trades 203bps.
- Precious metals are lower with gold -$8 @ $1219 and silver -$0.52 @ $18.00.
Dollar Marches On:
The Dollar Index
remains strong as it rallied to 84.78, its best level since July 2013. Expectations for a rate hike are on the rise and the potential for divergence with other central banks remains high. This has made the dollar the one of the strongest performing currency over the past few weeks. This 84.75-85 area will be a key resistance test for the dollar.
- The euro is sliding closer to the key 1.2800 support level. The single currency previously bounced of this level three times in 2013. So investors will be looking to see if it can once again hold. PPI numbers released in Germany remained weak. Market focus will turn to preliminary PMI numbers (Tue), a Draghi speech (Mon), and a number of German surveys later in the week.
- The pound is seeing a sell the news reaction to the Scotland vote. Sterling was able to rally to 1.6530 in overnight trade as participants bet that the 'No' votes would win. The news that the 'No' vote won and garnered 55% of the vote, higher than previous projections, was a relief to markets. But traders took the news in stride and sold cable. This saw the pound tumble back to the 1.6300 level which it is attempting to hold.
- The yen continued its decline against the dollar as it fell to a six-year low of 109.54 in overnight trade. The yen is coming into the 110 area now which will set up as the first meaningful test of long-term support for the currency. But the downward trend is firmly in tact here.
Treasuries Drift Little Changed:
- Treasuries erased their early losses and rallied to session highs ahead of the equity open before giving back some of those gains.
- The complex is seeing little response to the leading indicators (0.2% actual v. 0.4% expected) miss as maturities hold slim gains.
- Light buying has yields across the curve off less than -1bp with the 10Y holding above 2.620%.
- A slightly flatter curve has developed as the 2-10-yr spread trades 204.5bps.
- Precious metals are near their lows with gold -$6 @ $1221 and silver -$0.19 @ $18.32.
- Yields push lower across Europe after the Scotland 'NO' vote means the country will remain a part of the United Kingdom.
- Eurozone current account surplus widened to EUR18.7 bln (EUR14.3 bln expected, EUR18.6 bln previous).
- German Bunds hold small gains amid a rather lackluster session. The 10Y is off -2bps @ 1.020% as trade has been limited to a tight 4bp range.
- UK Gilts are bid as Scotland will remain a part of the United Kingdom. The 10Y is lower by -2bps @ 2.555%.
- French OATs sport modest gains amid word the country has begun airstrikes in Iraq against the Islamic State. A -4bp drop has the 10Y down to 1.410%.
- Spanish Bonos are sharply higher as the Scottish 'NO' vote has calmed fears of a Catalonia succession. The 10Y has slumped -8bps to 2.195%.
- Italian BTPs piggyback the move in Spain. The 10Y is down -4bps @ 2.390%.
Dollar Nears July 2013 Highs:
- The Dollar Index presses session highs near 84.55 as trade contends with the July 2013 highs.
- EURUSD is -55 pips @ 1.2860 as trade tests the recent lows. A lack of economic data and news from the region means the single currency is a victim of dollar strength. The only notable news out overnight were reports indicating France has begun airstrikes against the Islamic State in Iraq. Support in the 1.2800 remains key.
- GBPUSD is -55 pips @ 1.6385 amid a volatile session. Sterling spiked to a high of 1.6525 after the 'NO' vote was declared the winner in the Scottish independence referendum with 55% of the vote. However, sellers emerged in defense of the resistance level and have managed to push action into the red.
- USDCHF is +40 pips @ .9380 as trade holds just off its best levels in a year. A quiet session for news and data out of Switzerland has action tightly correlated to the euro.
- USDJPY is +15 pips @ 108.90 as trade clings to small gains. News the Japanese government downgraded its economic assessment ran action to a fresh six-year high of 109.46, but trade has backed off the level. The pair has rallied more than 600 pips over the past month as a slowdown in Japanese data has created speculation more QE is on the way.
- AUDUSD is -25 pips @ .8960 as trade presses support at six-month lows. Support in the .8900/.8950 area will be watched closely in the days ahead. USDCNY was little changed @ 6.1410.
- USDCAD is +20 pips @ 1.0960 as action fights to hold support in the area. The pair will be in focus this morning as CPI and wholesale sales will cross the wires.
Treasuries Slip in Early Trade:
- Treasuries have won back a large portion of their overnight gains, but remain in negative territory.
- Macro headlines out overnight impacting trade included Scotland voting 'NO,' meaning it will remain part of the United Kingdom, and the Japanese government downgrading its economic assessment.
- Action has so far been limited to its usual 3bp range.
- Up front, the 2Y holds +0.4bps @ 0.577%. Action over much of the past two weeks has flirted with levels last seen in May 2011.
- In the belly, the 5Y is +1bp @ 1.851%. The yield continues to print at its highest levels since July 2011.
- The 10Y trades +0.4bps @ 2.632%. The benchmark yield tests resistance in the 2.650% area that is guarded by the 200 dma.
- Light selling at the long end has the 30Y +0.2bps @ 3.361% with action sitting near a two-month high.
- An unchanged curve has the 2-10-yr spread stuck @ 205.5bps.
- Precious metals are lower with gold -$5 @ $1222 and silver -$0.08 @ $18.43.
- Data: Leading indicators (10).
5Y Closes at 1.841%, Highest Since July 2011:
- Treasuries endured a mixed session as buying took place across most of the complex while sellers were in charge at the long end.
- Maturities put in their highs before the start of U.S. trade and pressed to their worst levels of the session in response to mixed data. Housing starts (956K actual v. 1045K expected) and building permits (998K actual v. 1054K expected) both fell short of estimates while initial (280K actual v. 305K expected) and continuing (2429K actual v. 2495K expected) beat.
- The post-data selling would mark the lows as buyers emerged into the Philly Fed (22.5 actual v. 23.25 expected) miss.
- A choppy trade would persist for the remainder of the session, keeping yields locked in a tight 2bp range.
- Today's tepid 10Y TIPs auction provided some volatility, especially at the long end, but trade finished at pre-auction levels.
- Up front, the 2Y added +1.7bps to 0.573%. Action continues to flirt with levels last seen in May 2011.
- Selling continued to have the biggest impact on the belly as the 5Y climbed +3.7bps to 1.841% as trade put in the highest close since July 2011.
- The 10Y climbed +2.9bps to 2.629%. The benchmark yield tested levels dating back to the beginning of May, but resistance in the area helped by the 200 dma proved difficult to conquer.
- Outperformance at the long end dropped the 30Y -0.5bps to 3.359%. The yield on the long bond remained near a two-month high.
- A slightly steeper curve developed as the 2-10-yr spread widened to 205.5bps.
- Precious metals saw more selling as gold fell -$9 to $1227 and silver slid -$0.18 to $18.55.
- Data: Leading indicators (10).
Franc Strengthens as SNB Maintains Floor, Talks Negative Rates:
- The Dollar Index probed the 84.70 level in early trade, but steady selling over the course of the session has wiped away those gains. Action now hovers little changed near 84.30.
- EURUSD is +70 pips @ 1.2915 as buyers have taken control following the smaller than anticipated TLTRO program. Today's bid has run the single currency off 14-month lows, and has allowed action to reclaim minor resistance in the 1.2900 area.
- GBPUSD is +115 pips @ 1.6375 as action rallies to a two-week high. Sterling has found buyers as exit polls suggest a majority of Scots voted 'NO' in today's independence vote. Results are due out tomorrow, and are likely to cause volatility in the pair.
- USDCHF is -80 pips @ .9345 as trade gives back all of yesterday's gains. This morning, the Swiss National Bank kept policy unchanged, reiterating its EURCHF1.20 floor while also once again hinting at the possibility of negative rates. Support in the .9320 area will be watched closely in the days ahead.
- USDJPY is +20 pips @ 108.70 as trade presses to six-year highs. The pair continues to climb as a recent run of weak data has caused many to speculate the Bank of Japan will have to up its QE program.
- AUDUSD is +25 pips @ .8980 as buyers take control for just the second time in nine days. The hard currency has seen a bounce off key support in the .8950 area.
- USDCAD is -65 pips @ 1.0950 as sellers attack for the third time in four days. Support in the area will be watched closely into tomorrow's Canadian CPI and wholesale sales data.