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Observations about US Yield Differentials, and the Swiss Franc

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

Contrast this with the change in the British two year gilts over the past week.  The yield on the gilts went from 1.30% to 1.56% during the week.  The higher yields on the British gilts, combined with the chatter 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, has kept the pound firm.  Though 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 attach 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 US yields are higher this week is because of the Treasury auction.  The total auction of $72B is comprised of $35B 2 year notes,  followed by $24B 10 year notes on Wednesday, and  $16B thirty year bonds on Thursday.   Strange how the yields almost always go up on auction week, but then if you are a primary dealer bidding of 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 today.   The latest Commitment of Trader Report released on 02 04 2011 showed the speculator is enthusiastically bearish on the USD.  Our weekly analysis showed the open interest in futures, and delta adjusted option 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 festivity, 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 Feb.  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.