Just a quick note to remind investors/followers that the PM trade is not off the table. It may have just been delayed due to regulatory changes in USD funding.
Robert's blog details the reasons, but I'd like to repeat the part that caught my attention.
"Today, Sept 30, is last day before the weekend, is month-end and quarter end. Quarter-end is often a tumultuous period. Banks typically rein in collateral lending as they shore up balance sheets, driving up rates on repos (as what is happening now). When banks curb repo activity, or repo costs have become very high -- money funds, the key cash providers in the transactions -- need alternative places to invest and they usually go to short-term Treasuries (one of the reasons why 3-mo bill rates were collapsing -- prices were going higher).
In this quarter-end, the movements are out of the ordinary, partly because of the looming Oct. 14 deadline for the overhaul of rules governing money funds -- MM fund managers are looking for alterative places to park funds. One alternative are the repos -- the amount of money piling into the Fed's overnight reverse repos surpassed $270 billion, one of the highest levels since officials opened the program in 2013. The other is of course, short term Treasuries.
We said before that the US Dollar was trapped by strength provided by high demand for USD by foreign banks (as we speculated in an earlier report) and the weakness provided by the narrowing rate differentials between the USD and other major currencies. This pretty much explains why the USD was sideways in the past few weeks.
But today (the last day of the quarter), we should see some adjustments. We should see the repo rate coming down, and the bill rate going higher -- that speak volumes about the shift in the demand picture. Funds looking for places to park their money (quarterly pressures) would have done so before the end of the trading day. That will leave just the MM fund managers still looking for alternatives. That will be a new problem which will be tackled next week. For me the better solutions are US T-Bills. So I would expect T-Bill rates to fall again sharply next week (along with the 10-year bond yield -- all tenors will be brought lower).
This has strong implications for the US Dollar. Demand for USD should slacken today -- and the USD should commence a long-awaited decline. Repo rates should slacken as well next week. That combination should undercut support for the US Dollar -- and we should finally see a sharp (but likely brief) US Dollar decline starting next week.
You can read the whole update here. seekingalpha.com/instablog/910351-robert...
The models usually work (always work) but the secret to their power is to understand divergences. If you've followed along up to now, you'll have heard Robert and I discuss divergences. Earlier in the year, I stayed with my PM trade in spite of the divergences in the models and it worked out for me. Now, not so much. But let's see how these divergences get resolved and how we might make some money on this.
Understanding leads, lags and divergences is critical. Only news (or regulations) can change a model and we've just seen it. Investing always comes with risk. If (OTCPK:WHEN) the USD cooperates, we'll see if the models really perform.
Disclosure: I am/we are long CHK, CLR, APA, APC, CPG, GXO, CRLFF, GDXJ, AG.