Dollar Bears Taking Money Off the Table? Consider the Swiss Franc

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For the past week, the value of U.S. Treasuries has been sinking, and as a consequence, yields have been rising. Last Monday 2-year U.S. notes were yielding .55%. Monday morning they were yielding .77%. The 10-year paper had a similar rise, from 3.35% to 3.66%. While the U.S. notes were appreciating 22 basis points, the German 2-year paper was unchanged at 1.4%. The unchanged German rate is no doubt one of the factors contributing to the euro weakening on the USD.

Contrast this with the change in the British 2-year gilts over the past week. The yield on the gilts went from 1.30% to 1.56% during the week. The word is that the Monetary Policy Committee of the Bank of England, alarmed because of the high inflation rate, may move closer to raising the current .50 bank rate. That chatter, along with the higher yields on the British gilts, has kept the pound firm. Although Mervyn King, Governor of the Bank of England, expects the inflation rate to come down later this year, you never know what a group of economist will say to get their names in print. If bankers and economist think they will stop global price increases of food and energy with a .25% increase in the bank rate, this is a modern day equivalent of Don Quixote's attack on windmills. The pound is holding firm with the euro and the USD because traders are hoping for hawkish comments on Thursday.

Part of the reason U.S. yields are higher this week is because of the Treasury auction. The total auction of $72 billion is comprised of $35B 2-year notes, followed by $24B 10-year notes on Wednesday, and $16B 30-year bonds on Thursday. Strange how the yields almost always go up on auction week, but then if you are a primary dealer bidding on a couple of billion paper, it is nice to have an edge. Chances are the yields will go back down next week, giving the dealers a windfall profit on their inventory.

There may be another reason for some USD strength beside changing interest rate differentials on Monday. The latest Commitment of Trader Report released on February 4, 2011 showed the speculator is enthusiastically bearish on the USD. Our weekly analysis shows the open interest in futures and delta adjusted options increased by 64,814 contracts for the week; a large increase. Further, the combined large and small spec traders for the week bought 60,601 contracts of other currencies, which leaves them betting against the USD. The total long something else, and by default, short the USD, swelled to 275k contracts.

When the bulls or the bears are throwing a party, it is always nice to get there early. Then, as the late arrivals pay their dues and join the festivities, the party can get pretty exuberant. At the end, however, the party can get ugly. Are we there yet, to the place where the USD bears want to take some of their money off the table?

One of the interesting set ups, after analyzing the COT report in conjunction with the charts, may be in the Swiss Franc. For decades the CHF has offered security, shelter, and secrecy for the fearful. This is not a large market, with only 50,666 contracts open. The open interest did go up 13% during the past period, the result of speculator buying. Large and small specs both have a 2 to 1 long versus short in the SF, and together are long 89% of the total open interest.

The USD/CHF chart looks interesting with the appearance of a double bottom in early January, and again early in February. If the 1/11 high of .9780 is conquered, this would also trade above a trend line and elicit stops. Trade above the .98 handle would probably precede a run to parity. You will also note the MACD, at the bottom of the page is giving a buy signal. Chose your entry level and take appropriate money management stops. As we all know conditions can change.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.