From the Desk of Ian Culley @Ianculley
Don’t take your eyes off the US dollar and interest rates!
I know it’s been a long year, but we’re finally witnessing early signs of potential trend reversals. The breakdown in the dollar last week confirmed the mounting evidence suggesting the USD has reached its peak.
Now, will interest rates follow?
Check out the dual pane chart of the US dollar index $DXY and the 30-year yield $TYX:
They look almost identical. The recent breakdown in the dollar marks the lone flaw between the two, raising the question…
Will the strong relationship between rates and the dollar hold?
I won’t pretend to know where rates are headed. But if the dollar and rates remain on similar paths, my money is on declining yields at the longer end of the curve.
A falling 30-year yield also makes sense based on a potential failed breakout above 4.00%:
Yesterday, the 30-year yield fell back below its former 2014 highs after peaking late last month. Risks are now to the downside toward 3.25 as long as the 30-year holds below those former highs. It’s messy!
I can’t think of a better scenario for stocks. Equities across the board are already enjoying a weaker dollar. Imagine how they would react if rates stopped rising or at least slowed down.
Falling rates at the long end of the curve could signal buying opportunities for long-duration assets. That’s something we haven’t been able to say for a while!
Whether the 30-year slides lower remains to be seen. Regardless, the dollar and rates have been the focus all year. That hasn’t changed.
If anything, these two wrecking balls deserve our attention now more than ever, as their trends appear to be changing course.
Stay tuned!
Countdown to FOMC
Following this week's PPI print, the market is pricing in a double-hike in December, followed by a single-hike in February.
Here are the target rate probabilities based on fed funds futures:
Click the table to enlarge the view.
This data is from the CME FedWatch Tool as of November 17, 2022.
Thanks for reading. And please let us know what you think.
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