US Dollar Poised to Rebound on Treasury Yield Outlook

The US dollar continued to carve out significant lows against major foreign counterparts, with the Euro trading at all-time highs of $1.3786 through mid-morning. The British Pound was similarly bid against the downtrodden greenback, scaling fresh 26-year peaks at $2.0362. A sudden drop in the Yen saved the dollar from a more pronounced tumble, with the dollar gaining 0.50 yen to ¥122.10 at time of writing.

Economic data was scant on the day, with an early-morning MBA Mortgage Applications report doing little to spark volatile moves in the North American currency. The Mortgage Bankers Association announced that applications for home loans gained 1.1 percent last week?its strongest gain since the seven day period ending June 8th. Yet the dollar actually moved slightly lower in the moments following the report. Given overall market jitters on the present state of the mortgage lending sector, any sudden gains in new home loans can only heighten fears of large-scale defaults on debt obligations. A sharp rise in defaults would undermine a very significant source of cheap capital across the broader economy and have far-reaching effects across asset classes. Absent such an outcome, we will continue to see historically low financing rates for US businesses?boosting liquidity and driving investment.
Cheap liquidity was the primary theme in US equity markets on the day, as stocks gained on speculation of further share buybacks and mergers and acquisitions. The Dow Jones Industrial Average added 68 points to 13,569, the S&P 500 gained 6.50 to 1516.67, while the tech-heavy NASDAQ composite inched 9 points higher to 2,648. US Food Chain operator Yum! Brands advanced on a report that said the firm would likely repurchase its own stock after reporting stronger-than-expected earnings. News of large share purchases likewise sent raw materials producers higher, with Chipparral Steel agreeing to be bought out for $4.22 billion. The size of the deal paled in comparison to rumors of a pending $34 billion bid for Alcan, Canada?s largest aluminum producer, by metals conglomerate Rio Tinto. Outlook for such large purchases can only continue to fuel domestic equity gains, but a sudden rise in borrowing costs could easily derail such a trend.
Fixed income markets retraced some of yesterday?s pronounced gains, with the 10-year Treasury Note losing 15/32 points in price; yields on the benchmark T-Note gained 6 basis points to 5.08 percent. It seems as though price has bounced off of a small downtrend line at 96, which would imply that bond yields may head higher in the coming days. Given that the dollar index now rests at the support line of a fairly well-defined price channel, it may be only a matter of time before the greenback posts a short-term bounce.