Marc Chandler's  Instablog

Inflate This

Ten year Treasury yields are flat on the week after yesterday's strong rebound and limited follow through today.  Yet the sharp rise in yields, including mortgages and agency bonds, had prompted speculation that the Fed would have to step up its purchases and there was even some talk that it could not wait until the next FOMC meeting which scheduled for June 24th.   ...

Yet what the Fed announced this week seems to point in the opposite direction.  It indicated that over the next two week it will make four purchases of US Treasuries.  It is the second consecutive two week period it will make four purchases.  Yet in four of the first five periods, the Fed bought Treasuries in five operations.  ...

The Fed has purchased an average of a little more than $26 bln worth of Treasuries in each two week period.  It would seem that if the Fed wanted to protest the backing up of rates it could accelerate its purchases and/or concentrate them more, which it does not appear to be doing.  &nbs...

At the current rate, the Fed would have bought the $300 bln of Treasuries it committed to in late March by late August.  Many expect the Fed to tweak its program and buy more Treasuries.  Currently there is much guessing about when the Fed would announce the details.  While some expect it to announce more details at the upcoming FOMC meeting, partly because if not then, the next FOMC meeting is not until August 12th.  There is a great deal to be said about strategic ambiguity (who knew that the ECB had a secret--"undisclo... swap line with the Riksbank from which 3 bln euros was tapped this week), but when it seems officials want to be fairly clear and transparent about their controversial long-term asset purchases.  ...

The US auction was fairly well received.  The bid-cover ratio was 2.62.  This compares with 2.47 last month and an average of 2.40 in the past ten auctions.  Indirect bidders, which include central banks, took down 34.2%, this is a modest increase from the 31.9% in May and an average of just below 26% in the last ten auctions.  Despite these traditional metrics being better than expected, US yields have continued to rise. It is ture the auction was a little sloppy and the tail was large, but given the supply, it is not surprising and would appear to be offset by the more other optics.  The main reason that the bonds seem to be still selling off is that large suply continues to loom on the horizon.  Tomorrow the government auctions 30-year bonds.  &nbs...

In choppy trading the dollar is being sold into the end of the European session and new lows for the session are being recorded.   Now that cooler heads are prevailing and expectations of a Fed hike are being unwound, the dollar appears poised to return to the lows seen last week.   ...

Euro:  Next target is near $1.4070 and then $1.4135, but the risk is for a test on the $1.4335 level seen last week.   Support is seen near $1.3950-70.  Many momentum traders got squeezed out of long euro positions and have scrambled to re-establish them.   ...

GBP:  Sterling remains stellar-- its recovery from a 8.5 cent decline in 4 sessions has been impressive.  It has retraced more than 50% of that decline and the next retracement target is $1.6334.  Above there, look for $1.6450 and then $1.6660.   It remains well supported against the euro as well.   ...

JPY:   The dollar ran into a wall of offers--some suspect them to be exporter related--in front of JPY99.  The dollar is now testing its 5-day moving average near JPY97.46 and the initial retracement objective near JPY97.19.  The near-term risk extends toward JPY96.65 and possibly to JPY96.00.  &...