Thursday, March 20, 2014

USD Dollar Index XEU Euro TNX 10-Year Treasury Note Yield Daily Charts Yellen Aftermath

Fed Chair Yellen had her coming-out party yesterday; her first FOMC meeting. The bottom fell out in markets when Yellen provided a six-month target period for the time between when QE stops and the first rate hike will begin. Since QE is on schedule to finish in August or September, and Yellen herself says Fall of this year, which is September through November, add six months and the first rate hike will occur between February and May of 2015, only year away. Trader consensus for the first rate hike is June 2015 so Yellen has reduced this target by about three months and markets respond wildly.

The dollar launches higher from the falling wedge mentioned a couple days ago. The dollar is moving sideways through 79.3-81.3, a 2-point range, for months. The dollar may seek a move sideways through the center channel, 79.8-80.8, going forward. The strong move in the dollar sends the dollar/yen currency pair higher above 102 and the euro/dollar lower off the recent highs. The euro, XEU, receives a slap down from the rising wedge and is testing the lower rail of the upward-sloping red channel. Note how the euro dropped to the top trend line of the sideways channel at 1.3830. A bounce or die decision is required today. Euro is at 1.377 losing the 1.38 level as this is typed. Keystone is short the euro via EUO. ECB's Draghi will be content seeing the euro drop. A lower euro is needed in Europe to boost the manufacturing and export industries and pull the continent out of the slump. A higher dollar, however, will place pressure on commodities moving forward.

The 10-year yield catapults higher towards the 2.80% top channel trend line. The 10-year yield has moved sideways through 1.50%-3.00% for months and more specifically through 2.60%-2.80% for over two months. The move either up and over 2.80%, or collapse under 2.60%, will be very telling. Inflation and banks win above 2.80% but telecom and utilities will be smacked. Deflation and telecom and utilities win below 2.60% but banks will be smacked. Interestingly, the short end, 2 and 5-year yields catapulted higher along with the 10-year yield and the yield curves did not particularly steepen to any great extent. Banks need a steeper yield curve moving forward if they plan on making money. This is why a jump in banks occurs when the yield moves higher. Keystone uses a 255 basis point 2-10 spread as an indicator where banks become happy. The 2-10 spread remains at 235-ish well below the 255 the banks wnat to see. The spreads remain relatively the same after Yellen's comments indicating that the short end yields are moving strongly higher in relation to the long end.

The BOJ and Fed use the dollar/yen to goose the stock market. The BOJ weakens the yen which sends the dollar/yen higher and stocks higher. A higher dollar, however, will change this relationship moving forward. The euro may take on a stronger leadership role moving forward with a higher dollar = lower euro = lower commodities = lower stocks and lower dollar = higher euro = higher commodities = higher stocks. The higher dollar path is anticipated moving forward. Chair Yellen's tenure kicks off in dramatic fashion. Watch the break of TNX either above 2.80%, or below 2.60%. This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.

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