Strong Dollar

Tuesday, October 02, 2007

ECONOMIC DATA / NEWS

It is a quiet day for economic data, which is a nice change of pace.  It may not give much help to rates, but it certainly doesn’t hurt them.  The rest of the week does feature a couple of reports a day, with the most significant data (employment numbers) coming out Friday.

Oil prices, which have been almost as volatile as the bond markets lately, fell below $80 per barrel.  After the Fed cut their rate two weeks ago, some people were worried that it opened the door for inflation to roam free.  Those fears were heightened when oil prices shot to almost $84, due to declines in reserves and weather problems, like the hurricanes in the Gulf Coast.  Now, oil experts are saying that greater declines in prices are more likely.

Debates have arisen amongst financial analysts whether oil will continue to be denominated in dollars.  The weakening dollar has raised speculation that some countries may start holding the euro as their primary reserve currency.  However, economists for some oil companies have said that they believe oil will remain in terms of dollars for the foreseeable future.  Those statements have helped the dollar rally against the euro, because countries will be forced to hold a fair amount of dollars if they must have the U.S. currency to purchase oil.  A stronger dollar translates into more valuable U.S. assets, which obviously includes bonds.

TECHNICAL ANALYSIS

The stronger dollar seems to be supporting the value of bonds.  The FNMA 30-year 6.0% is up another 3bp this morning at 100.25.  The 10-day moving average has been holding prices down for the past nine days, but the last four candlesticks, including today’s, have been knocking against this resistance level.  The current candlestick is busting its way through, and a close above the line, currently at 100.15, would be a positive move toward another upward trend.  The next resistance is the gap lower at 100.44.

The 10-year Treasury yield keeps drifting lower.  It is making its way toward the 50-day moving average at 4.52%.  This could be a tough level to break though, since the yield had been below it for most of the last three months, prior to about two weeks ago.  Prices or yields tend to trade above and below moving averages for roughly the same amount of time over a long enough period, hence the term “average.”  The yield is a bit under 4.54% at the moment.

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