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Steepening Yield Curve after FOMC Minutes Bodes Well for Dollar

Steepening Yield Curve after FOMC Minutes Bodes Well for Dollar

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Euro-Zone PMI figures disappoint, confirming ECB’s reason to cut rate again.

- US yields, especially on long-end, soared yesterday after a December QE3 taper was made possible.

- Relatively light calendar in US today keeps focus on FOMC.

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INTRADAY PERFORMANCE UPDATE: 11:00 GMT

MAJORS

AUD

CAD

CHF

EUR

GBP

JPY

NZD

(vs USD)

-0.69%

-0.11%

-0.04%

+0.01%

+0.02%

-0.84%

-0.69%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.23% (+0.15% prior 5-days)

ASIA/EUROPE FOREX NEWS WRAP

The US Dollar surged yesterday and has retained its gains overnight after the Federal Reserve’s October meeting Minutes suggested that an improving economy could warrant a taper of QE3 over the coming months. Considering that the October policy meeting took place before the October NFP figures were made available – they were pushed back a week thanks to the government shutdown – it’s possible that early hope for further improvement in data may already be transpiring.

Accordingly, as the Fed struggles to differentiate “tapering” from “tightening” – a way to show that they intend to keep rates low even after bond buying ends – market participants have taken the news as the most recent sign that a relatively more hawkish stance in monetary policy should be expected.

Over the past few days, certainly aided by the FOMC Minutes, the US Treasury yield curve has undergone a phase of “bear steepening” – that is, longer-term interest rates are rising than short-term term interest rates. The widening of the yield curve is apparent when looking at nominal changes over the past week and month:

Steepening_Yield_Curve_after_FOMC_Minutes_Bodes_Well_for_Dollar_body_Chart_1.png, Steepening Yield Curve after FOMC Minutes Bodes Well for Dollar

A steepening yield curve in the fashion it is occurring is often indicative of confidence in the economy. As such, the US Dollar has leapt higher against the two groups that are highly sensitive to QE3 taper talk and higher US yields: the commodity currencies and the safe havens. Of interest today is the USDJPY which is attempting to confirm a major topside breakout:

USDJPY Daily Chart: September 11, 2013 to Present

Steepening_Yield_Curve_after_FOMC_Minutes_Bodes_Well_for_Dollar_body_x0000_i1028.png, Steepening Yield Curve after FOMC Minutes Bodes Well for Dollar

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- The USDJPY remains supported by an uptrend dating back to November 2012, and a more concerted uptrend since April 2013.

- Price broke out of the symmetrical triangle (dating back to May) in early-November, but faces its first major former swing level today at ¥100.60/86.

- Profit taking may occur (longs trapped since September, last time price traded this high), but the trend remains higher until 99.00 is closed below on a weekly basis.

- A weekly close above 100.86 (alongside higher US yields – 10YY above 2.830%) would suggest that a return to the yearly highs (103.73) may be around the corner in December.

Note: I’ll be hosting a special strategy session on using the StrongWeak app to find short-term momentum opportunities with DailyFX Trading Instructor James Stanley today at 11:00 EST/16:00 GMT – register here.

ECONOMIC CALENDAR – UPCOMING NORTH AMERICAN SESSION

Steepening_Yield_Curve_after_FOMC_Minutes_Bodes_Well_for_Dollar_body_Picture_1.png, Steepening Yield Curve after FOMC Minutes Bodes Well for Dollar

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. Want the forecasts to appear right on your charts? Download the DailyFX News App.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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