New Lift for the USD

CURRENCY FUTURES

In retrospect, the ability of the bull camp to keep the dollar supported after what appeared to be a blowoff top last week is impressive, but the bull camp was clearly saved by the markets shift away from expectations of a US rate cut on December 18^th. However, the dollar has found new lift from doubt on the ability of the Bank of Japan tighten monetary policy further and from the potential for a Chinese rate cut later this week (which should keep the yuan under pressure). Another potential supportive angle for the US dollar is a noted drop in UK home prices this morning as that should leave the Bank of England in a dovish posture and the Pound under Pressure. From a technical perspective, the dollar rally this month has been very steep and upside momentum appears to have moderated for now increasing the potential for larger but temporary corrective dip’s.

STOCK INDEX FUTURES

As expected, the relief from the uncertainty of the election and the typical “investor hope” following the passing of an election has waned. Furthermore, the US Federal Reserve Chairman last week tossed water on the prospect of a December rate cut and the headlines are full of draconian impacts predicted from US tariffs. In fact, this morning ECB officials expressed concern about growth and not inflation because of the potential for US tariffs. Fortunately for the bull camp, optimism toward the chip sector is positive with Nvidia thought to be poised to merge with or buy another company from its 175 billion cash hoard. Sentiment toward Netflix was also boosted by the 65 million viewers of the boxing match and by news that the Netflix ad supported customer base hit 70 million users.

INTEREST RATE MARKET FUTURES

The technical bias remains down in treasuries with the fundamental tilt also leaning minimally in that direction. In retrospect, last week’s monthly US inflation report cycle appeared to be neutral but was judged to be less than satisfactory by the treasury market. In a study that should not be discounted, Bloomberg charted the reaction in 10-year treasury yields following the first rate cut of a rate cutting cycle and discovered the current upward thrust in rates was the largest of the seven rate hike cycles documented since 1989. Another potential fundamental sign of an overdone selloff is the wide disparity between 10-year treasury yields and mortgage rates and the question becomes are 10 yields too low or are mortgage rates too high? Unfortunately for the bull camp the Fed Chairman recently poured water on the prospects of a December rate cut and a Japanese brokerage firm overnight projects the Fed will not cut. The CME Fed watch tool has reduced expectations of a rate cut from the high 90s several weeks ago to only 61%. Looking directly ahead, this week’s important economic reports will likely be Housing Starts and permits which projects higher permits and slightly softer starts. However, this afternoon’s treasury International Capital Flows Report could be critical as the trend of Chinese liquidation could renew pressure treasuries especially if the Japanese also show less interest in US debt.

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