Everyone is making a big deal out of the weakness of the USD Index. Quite frankly we think that a weakening USD Index is no big deal. The bigger deal is the breakout in commodity prices in USD terms and the immanent breakout in “non-USD” terms. Few punters are aware that the major commodity indices (CRB, Goldman, DJAIG, & Rogers) in EUR, Yen and CAD terms are within the length of a whisker of breaking to a multi-week high. This adds strength to something big happening in the commodity market which suggests rising commodity prices are not just limited to the weak USD thing.
We have been rather perplexed at how the US 30yr price has remained relatively strong in light of such a powerful breakout in commodity prices. The real move lies within one of these markets, we think that the real move lies within the commodity market rather than the US 30yr market. Furthermore we think that the US 30yr bond is being held up by the US Treasury at the cost of a falling dollar.
Perhaps the US Treasury is all well too aware that they have to keep yields low to fund their budget deficits and to keep housing mortgage rates (which are linked to the 30yr) low, which in turn holds up housing prices, which in turn stops housing defaults and bank write-offs (albeit dramatically reduces defaults and write-offs). If this is the case it boggles our mind to think what will happen if yields on the 30yr blow out! In light of this we would not be surprised to see the USD Index move significantly lower over the coming weeks.
But of course all of this money printing to keep the US 30yr yields low leads to inflation and in itself much higher commodity prices. Anyway for whatever reason commodity prices are rising and it would appear, from a technical perspective, that they are about to go significantly higher against all paper currencies (including the Aussie). If this does happen (let’s say that crude gets to $100 by year end) what will happen to US Treasury yields? OK so we are wrong…..let us ponder the possibility of crude getting to $120 by the end of March next year? What will the yield of the US 30yr get to then?
We find it hard to believe that US 30yr yields will remain within a stone’s throw of their current levels if oil prices and commodity prices in general blow out the way the charts are suggesting they will.
In the late 1970s it all ended in tears for the Hunt Brothers when they tried to corner the silver market, why do we get the same feeling that the US Treasury is heading down the same path that Nelson and William did!
