USD 10 minus 3 month spread = 1.02, 10Y minus 2y = 0.51, 30Y minus 2 = 0.85 and current OIS = 0.27. Where is Queen Yellen and DXY.
DXY is explained by the 10Y minus 3 month at 1.02 as this represents in markets past, present and future the domestic interest rate. At 1.02, its the same old tired Yellen game, build a bottom before a raise but don’t dare create wide distance from bottom to a new raise. The game is wait until the bottom rises to sufficient distance then raise, if raise is the plan and if the bottom rises. The Queen’s consummate focus on bottoms lacks any ability to see and project forward. Fed Funds closes since the last raise at 1.42 means a 40 bps distance. This distance is miles to wide for the Queen.
Project 40 points to AUD, NZD, GBP and EUR and 40 is actually at barely 20 points. At 1.02, Yellen is killing DXY and forcing by osmosis, EUR, GBP, AUD and NZD higher. Until 1.02 rises, EUR, GBP, AUD and NZD goes higher. At 1.02 in years past under normal market prices, 1.02 should be around 1.42. The Queen’s new Repo rate deal is forever containing lower interest rates to move higher as interest rate traders at the lower rates are doing just fine. This means 1.02 doesn’t have a need or reason to move
Let’s perform the correct projections 5 years forward and we see from 1.02 to 1.10 is DXY from 92.17 to 92.77 from current 91.73. From current rates to exclude 1.02 then further resistance is built into current DXY from 93.22 to 95.04. Yellen’s story is to build resistance against a higher DXY.
At 1 to 5 years forward, let’s look at range breaks at 90.82, 89.93, 89.07 and 88.22. Its a painfully slow mover in DXY to kill it lower but slowly. Bond yield rises only further ensures more resistance to DXY rises. This explains why EUR skyrockets on Fed Rate rises. The Queen is playing the game backwards on a far different plane than what was normal in years past. Greenspan was the last to play the market game straight.
EUR/USD break points 1.2003 and 1.2114.
USD/JPY. Break points 112.71 and 112.45
AUD/USD 0.7847 and 0.7792.
NZD/USD. 0.7147 and 0.7061.