Since the election, the US Five Year Treasury yield has soared over 40 bps from around 1.25% to over 1.67%. As can be seen from the chart below, the level of just above 1.80% has functioned as a cap since the middle of 2013, when the ‘taper tantrum’ first jolted rates higher. Highs between 1.85% and 1.79% have been rejected at least 5 times since mid-2013, and we are now only about 15 bps away from this major resistance. (Blue line on the chart below).
Similarly, the dollar index (DXY) is also testing major resistance, ending today at 100.20, versus a high in early 2015 of 100.31 and late 2015 of 100.51.
The election of Trump has accelerated several themes. First, the idea that reduced regulatory burdens combined with fiscal stimulus can boost economic growth. Second, that inflationary impulses will gain steam, and small businesses will be encouraged to hire. Third, that central banks may become less of a factor in terms of being ‘the only game in town’ to support growth. While all of these ideas (and more) are valid, it’s important to realize that LOCATION is important when considering trade entry. Buying the Dollar and selling Five Year (looking for higher yields) is questionable at these levels given strong moves that have already occurred. Better to wait for a pullback or a confirmation breakout (of at least one week above resistance).
One final thought is that strength in DXY has been followed, with a small lag, with relative weakness in equity markets. We may have hit a major inflection point in markets due to the unexpected election result. However, sometimes it’s best to take a step back before jumping in head first. If there has been a structural change in markets and the economy, there will be plenty of trading opportunities going forward.
Alex Manzara
