A question on the tip of many traders’ tongues. No doubt. We can talk of “rogue” Fed Members whose name is not Janet Yellen pushing a hawkish message. In the end, it’s only her words that should truly matter.
There are three charts to watch that paint a clear picture of the direction of rates. While this does not mean this is a fixed trajectory, these three charts do offer GUIDANCE.
First is the U.S. Dollar Index Chart itself.
The U.S. Dollar Index’s downtrend highlights the lowered expectation of rate hikes near-term. Each correction higher met with selling pressure and then pushed lower to a new 2016 low.
Relatedly and perhaps even more important is the uptrend in the EUR/USD. The EUR/USD is the inverse to the U.S. Dollar Index. The 57.6% weighting of euros in the U.S. Dollar Index weighting makes the EUR/USD a powerful way to gauge the direction the U.S. dollar will head in. If I am not a willing EUR/USD buyer, I can’t really be a U.S. dollar seller.
The second chart is the Dow.
The world is still awash in cheap money. The Bank of Japan *could* do its part by intervening. Until that happens, there’s still a definite “lower for longer” mindset keeping the Dow strong. Another sign traders don’t see rates heading higher is the support on pullbacks in the Dow. Additionally, this has been support for commodity dollars (Australian and Canadian dollar) buys.
Finally, the contracts that has continued to add clarity: Fed Fund Futures.
Whether looking at the June, September, or December contract, the FF’s have not traded below 99.50 with any conviction. As long as the contracts don’t have 99.50 resistance, there is no cut priced in. And this takes us clear out to year end. Any talk of a rate hike should push Fed Funds through 99.50 and into 99.30 territory in the month that would be expected to include a hike from the Fed.
Looking at all three of these charts, their rate hike picture is far from hawkish.
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