Since last year, one of the greatest focus for investors has been speculation about the Fed tightening policy. The 2014 dollar surge was mostly explained by this phenomenon and it is not a question of if, but more a question of when Yellen and her colleagues will decide to end the zero interest rate policy that is currently in place.
At the time of this writing, most market participants anticipate the first interest rate hike to occur around mid-year.
What is interesting to note is the translation of this concensus in the market...
In the currency market, as previously stated, the US dollar got a particularly strong boost during the second half of 2014, benefiting from an on-shore monetary policy tightening cycle (taper) while at the same time the rest of the world already was or entering in a monetary policy easing cycle (think Japan and Europe). I believe this trend will continue for as long as those monetary policy divergences are in place, and that the dollar is only starting a multi-year uptrend. This is not an unconventional viewpoint I am sharing here, and in some sense that feels also a bit unconfortable at times (particularly now!). Already in end-2013 a strengthening dollar was a consensus and it turned out to be right. Sometimes the crowd is right whatever contrarians want to believe...
Turning our attention to the bond market, some very interesting developments need to be considered. First, and to the surprise of many last year, US treasury bonds entered an uptrend. Most expected interest rates to rise as the Fed was getting closer and closer to the first rate hike. That analysis, maybe logical at first, was totally ignoring the global macro of the world (and still continues to do so). In a world where Italy ten year government bonds are yielding less than 2%, in Spain it is 1.7%, in France 0.9% and in Germany 0.6% (no need to speak about Japan...), the 2.2% of the United States are looking like a bargain! The recent trend should not be of any surprise in that context to macro traders.
On the other hand, Junk bonds are telling what seems a warning story. Since this summer and inversely to treasuries, JNK turned lower expressing some sense of tension for the future. I believe it is related to speculation about the Fed next move, and a concern that in a slowing global economy, increasing interest rate could be a policy mistake and cause a recession.
I am not anticipating this myself at this point, as to me this Junk bond move looks more like a correction in a bull market than a first leg down in a bear market, but with some part of the global economy showing signs of concerns (deflation, energy sector, emerging market, Russia, etc...), I am not turning oblivious here like many professional forecasters seem to be (like those in Barron’s latest Round Table that are willing to take a completely rosy view of 2015).
The market message of the bond market, from treasuries to Junk bonds is quite worrisome. I advise anyone to be also alert to any developments here and not fall in the buy-and-hold trap that is so fashioned this days in financial medias...
The market message of the bond market, from treasuries to Junk bonds is quite worrisome. I advise anyone to be also alert to any developments here and not fall in the buy-and-hold trap that is so fashioned this days in financial medias...
Finally, as promised, I am doing a quick follow up on my AUDUSD trade of late last year.
As advised on my twitter account I closed one half of my position this week after completing my time and price projection. I decided to keep the other half to press a little bit my luck, as I see no macro factors that could potentially turn the trend on me at this time. But I allow myself to close it at any time when I feel the need.
Also I am looking to short EEM ETF (Emerging market). Ideally near 41.5$ at the end of the month/ beginning of February if price action looks good, for macro reasons explained on my previous blog post. I am keeping a close eye on this market.
For information only I am already short the Energy sector ETF (XLE) since the beginning of the year from 81.5$ after what I interpreted being a break-away gap, targeting 70$. That will be the subject of my next post on Energy and Crude Oil prospect and implications, so stay tuned ;)
