This is MACRO BREIF: Near-Term Dollar Weakness Probable in its entirety, which was originally published for subscribers on June 4, 2019.
In this installment of Charts to Ponder, we look at a rate differential charts and something even Luke Gromen would appreciate.
US/CN 10-Year Rate Differential (pink); DXY (yellow)
The U.S./Chinese 10-Year rate differential has been a chart I've posted before. It's a key differential when monitoring the health of DXY strength, but the positive feedback pricing in the next move by the Fed has caused the differential to flatten further to levels last seen in early-2018.
Considering the differential's lead time and the monthly rejection at 98.15. The near-term range for the dollar is widening, 98.66/96.44.
Treasury & Agency Securities Held by Commercial Banks YoY (blue); U.S. 10s/2s (black)
This chart is quite interesting and shows the total amount of Treasury securities held at all commercial banks YoY, currently increasing just over 10 percent.
It's overlaid with the 10s/2s curve, which is the primary curve I focus on because of its broad impacts to the economic cycle.
As record dealer inventories of treasuries continue to mount, the amount being held at commercial banks is also a record high; and the bank binge for treasuries seem to be a cyclical one with the rate of change sloping up and to the right into a recession.
This also pulls the 10s/2s up with it? Why? As Fed policy shifts, as it did in December 2017, the short-end gets piled into causing yields to plummet at a faster rate then the 10-year or 30-year yield.
Remember, The Macro Strategist has been calling for a break out in the yield curve's consolidation. This will have important implications for bond proxies, high-yield credit and the dollar.
The steepening of the curve directly impacts the dollar - at least initially. If the 10s/2s continue to steepening, expect the dollar to remain weak but supported.
The curve steepening will eventually hit a pain threshold that will impact credit markets that will cause inflows back into the USD.