Treasury auction took place yesterday and government got an unpleasant surprise. Buying was very soft for 10 year notes so interest rates had to be jacked up to 4%, at which level buyers became willing to conduct business. The 30-year yield reached 4.83 % during trading, the highest yield since October 2007. In the end, treasury sold $19 Billion worth of notes, but it was not a smooth going. With the huge amount of debt yet to be financed, this raises concerns for future auctions. I wrote about this in Treasuries and the Dollar.  Today Treasury will face new test when it tries to sell $11 billion in 30-year bonds. Dollar traders will follow results closely.
Success of it is largely dependent on participation of foreign buyers. There is a lot of talk about China and others dumping their US holdings. Most people misunderstand the issue. China is NOT going to suddenly sell her dollar holdings and switch them overnight to something else. This would be as damaging to their interest as it is to ours. Concern is in foreigners not being willing to finance our NEW notes/bonds issues. This is where the potential for problems exists. For example,  Russian central bank official said that Russia would redirect up to $10 billion of hard currency reserves International Monetary Fund notes. China followed suit announcing interest in putting up to $50 billion into IMF’s notes. These statements came just a week before China, Russia, Brazil and India gather for talks in Russia, where they are expected to discuss alternatives to the U.S. dollar as the global reserve currency.
In response to lower demand, investors will have to be stimulated with even higher rates. I’m not going to speculate about how high they need to get, because I don’t know. What I do know, however, is that higher long term interest rates will have to spill over to short term as well. This could, and probably will, make dollar attractive in current global, low rate environment. This will not be multi-year trend, but long enough to confuse most dollar traders. In my opinion, fate of the dollar, next major trend, will not be decided for weeks or even months. USD pairs will likely be contained within a wide price range.

USD-CHF is a good proxy for majors. Dollar tried to reverse, took out previous high, but is falling again. If it gets to about 1.0650 or so, it could be a good buy, offering very attractive stop loss and large potential. I doubt it would be a long term run. Bottom line is, anybody who trades USD long term should be paying attention to debt market even more than ever.
I mostly operate with much shorter horizons, so look for little different trades.

Kiwi had a very good day in a otherwise choppy week. Intermediate term charts suggest that today’s action was a correction, pull back rather than reversal. GBP-NZD price fell to the middle of this wide range. It also seems to be finding support on 100 SMA. I went long at 2.5652, thinking that this cross will resume an uptrend, test 2.6150 resistance again. My objective is a little less ambitious, about 400 pips.
Tomorrow I’ll go over my trades from this week and review action in Yen pairs. Returning to previous subject, I’m really interested what the summit in Russia will bring in terms of announcements. Will it be normal, customary posturing, or will the participants come up with some plan to diversify their foreign holdings away from the dollar? There could be large USD swings next week.

Mike K.