The Simple Acco...'s  Instablog

US Dollar gaining again overnight after yesterday's retreat. We can see a rising wedge forming on the chart after the bounce off the 76 support level. Bloomberg reporting Goldman London analyst expects Fed to buy Treasuries all the way out to 30 year. If accurate, that could be expected to reverse some of the curve steepening we've seen in recent weeks, and might catch some bond traders wrong footed. It would be consistent with the desire to support weak real estate markets by suppressing long maturities, a stated concern in a number of recent public comments by Fed officials.


Disclosure: no stocks mentioned

The US Dollar is rising again pre-market. SPX looks like it may be due for a pullback, but the NDX and the Dow industrials and transports still show strength. Breadth indicators still look solid pretty much across the board.

Lately some analysts, myself included, have been considering whether the inverse Dollar/equities correlation may reverse. So far the early evidence is leaning  in that direction. Trading implications: continued bullishness for stocks, weakness for commodities.

This week's much discussed negative yield TIPs auction appears to have confirmed the reversal in the bond market. Corporates have  joined Treasuries in the selloff as the market is repositioning for inflationary expectations. The deflation thesis which has held sway for so long seems to be receding.

The ever insightful Jeff Miller has raised the question of the U.S. Dollar / equities correlation. Very timely; readers know I have been looking at the Dollar as a signal for trading other asset classes, and posted my own brief visual study of the Dollar / equities relationship a couple of weeks ago. More recently, however, I have been wondering whether this tight correlation might be ending soon.

One of the reasons for anticipating a breakdown of the inverse correlation is the possibility of rotation out of bonds and/or commodities and into stocks. The bond rally shows clear signs of exhaustion and, judging by the action in TIPs and conventional Treasuries and durations coming in, it appears the fixed income market is positioning itself for inflation. Bonds had been priced for a scenario that doesn't seem to be playing out in the real economy, apart from the ongoing troubles in real estate.

Here the usual data points will come into play: watch ICI flow of funds, price and volume action in the various asset classes, etc. My trader's instinct tells my this is a growing possibility, but we need data to signal trades. It's not there yet, but this is something to watch for.


Disclosure: Author is Long TBT and various equities