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...
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 ;)
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