US: Can bonds and the USD recover together? - BBH

The US dollar appreciated against all the major currencies last week, but the gains were not sufficient to turn the tide of sentiment, according to Marc Chandler, Global Head of Currency Strategy at BBH.  

Key Quotes

“The bearish dollar narrative has shifted away from European and Japan exiting from their super-accommodative monetary stance to the return of America's  twin deficit problem.”

“The US will sell at least twice the debt it sold last year, but with the ECB and BOJ buying up all their new net issuance, supply and demand may not be disjointed to the point of requiring a sharp rise in yields, even with the Fed reducing its reinvestment.  The technical indicators for the US 10-year Treasuries are more constructive than sentiment would suggest, and the same is true about the dollar.”

“If one thinks that inflation will rise only gradually, then high real yielding (sovereign) bonds may be attractive because as they offer prospects of nominal yield declines, i.e., higher prices.  Positive real rates, calculated by the looking at the yields of the inflation-linked securities or by subtracting current headline CPI from the nominal yield, are not to be found in Germany, France, Japan, or the UK.  They are in the US.”

“A bullish divergence is evident in the RSI for the US 10-year Treasury note futures contract.  The lows in price were not confirmed by the RSI.  The MACDs appear set to turn higher, and the Slow Stochastics are not far behind.  A shelf has been etched out near 120-00.   On the upside, the 121-00 area, where the 20-day moving average is found may offer the immediate resistance.  It has not closed above this average since mid-December.  The yield peaked a little more than 2.95% in the middle of the week, and it finished the week at 2.88%. The 20-day moving average is near 2.82%.”

“The technical considerations for the Dollar Index are also favorable.  The RSI and MACDs show a similar bullish divergence as the US 10-year futures note. The Slow Stochastics are turning up as well.  Also, the five-day moving average has crossed above the 20-day average.  Admittedly, it has been stuck in a roughly 88.25-90.60 trading range over the past month, and the moving averages can whipsaw.    The lower end of the range may have formed a double bottom (88.43 on January 25 and 88.25 on February 16). The neckline is the top of the range, and a break would signal potential toward 93.00.  The 200-day moving average can now be found near 93.45.  The high for the year has so far been set on January 9 near 92.65.”