If you paid any attention to the financial markets last week instead of dusting up your opponents in Minecraft, then you would have noticed that Treasury bonds rose last week. 10-year notes fell to a record low yield of just 2.0346%. Remember, bonds prices are inversely correlated to interest rates (yields). If yields are falling, then bond prices rise, and vice versa if they are rising.
With the Volatility Index (VIX) spiking to as high as 48 after being stuck in range between 15 and 20 the previous three months, investors sought the safety of Treasury bonds, which is why prices rose.
That’s right folks- even with all the hullabaloo about the U.S. debt downgrade a couple weeks back, investors still want their hands on U.S. government notes! This indicates to us that in times of despair, Treasuries still contain that allure of safety, no matter what some rating agencies may believe.
Moreover, a look at the most recent Commitment of Traders report reveals that futures traders are dialing down their short dollar bets. Word on the street is that the aggregate total of short dollar bets against the other 7 majors and the Mexican peso fell by 154,105 contracts week, the biggest drop since the CFTC began compiling this data.
Digging a little deeper, we can see that the net positions for the franc and Australian dollar are down to long 4,655 and 29,016, down from the 21,119 and 60,015 figures we saw as recently as June 3. In addition, looking at Euro contracts, we can see that future traders are actually net short the euro by 8,273 contracts!
This ongoing trend means that traders are actually are beginning to limit their exposure to other currencies and are becoming less bearish on the dollar.
What do all these mean for the forex market, particularly for the good ole U.S. dollar? A quick glance at the weekly chart of the U.S. dollar index might help:
As you can see, the U.S. dollar index is currently treading closer and closer to its 2008 levels. During the third quarter of that year, just before the onset of the financial crisis, USDX found support around the 72.00 level.
When the global recession broke out after that period, the USDX jumped like crazy and reached the 89.00 level in a span of five months. Of course, as we all learned in the School of Pipsology, the dollar index is the weighted average of a basket of other currencies against the U.S. dollar. I can only imagine how many pips these other currencies lost to the U.S. dollar back then!
Thanks to the ongoing European and U.S. debt problems, risk aversion continues to loom like a dark cloud over the markets. In fact, as I showed you in my latest infographic, current market conditions are starting to resemble that of pre-recession 2008.
Amidst all this uncertainty, the U.S. dollar still seems to be the king of safe-haven currencies. Traders are wary to put their money in the Japanese yen or the Swiss franc because the BOJ and SNB have been stepping up their efforts to keep their respective currencies from appreciating. With that, do you agree that the U.S. dollar has reached a bottom?