OnTheRadar: Lower US Tsy Yld, USD Trend Underpins Crude Prices

--Euro Posts New 2.5-yr High, Cable 10-mos High

By Vicki Schmelzer

     NEW YORK (MNI)   - The recent trend for lower U.S. Treasury yields and a

lower dollar was evident again Monday and served to underpin crude prices at the

start of a new week. 

     U.S. yields were soft, but remained above recent lows, while the dollar

fell to a two-and-a-half year lows versus the euro near $1.1845 and a new

post-Brexit low versus sterling near $1.3204, the highest cable rate since Sept.

16.

     This week's U.S. data, if better than expected and or offering hints of

inflation, could be the catalyst for a turnabout higher for yields and the

dollar. 

     Ten-year U.S. Treasury yields were last near 2.294%, after trading in a

2.273% to 2.305% range. As background, yields traded near 2.32% ahead of last

week's Fed announcement. 

     The July 21 and July 24 low yield of 2.229% was the lowest since June 29,

when U.S. yields bottomed near 2.221%. 

     The market watched to see if U.S. yields will stabilize above or below the

55-day and 200-day moving averages, currently at 2.249% and 2.299%.  

     U.S. Treasury yields bottomed June 14 near 2.103%, which was the lowest

since Nov. 10, when 10-year yields saw a wide range of 1.991% to 2.145% two-days

after the U.S. election. Nov. 10 was the last time 10-year yields traded below

2.0%.

     U.S. yields subsequently recovered, with the June lows deemed overdone,

with 10-year yields rising to 2.396% July 7, the highest since mid-May. More

recently, U.S. yields topped out at 2.357% July 14 and have been on the

defensive subsequently. 

     As background, U.S. Treasury yields posted highs near 2.421% on May 11,

which was the highest yield since March 31, when the 10-year yield peaked at

2.431%. These levels will be the next larger topside hurdles.

     On March 14, ahead of the Fed decision, 10-year U.S. yields topped out at

2.628%.

     As a reminder, 10-year U.S. yields rallied from lows near 1.720% Nov. 9,

the day after the U.S. election, to highs near 2.639% on Dec. 15, 2016, which

was the highest since the Sept. 19, 2014, peak near 2.655%.

     Ten-year German Bund yields closed near 0.543% Monday, after trading in a

0.533% to 0.563% range. 

     Bund yields backed off after the ECB left policy unchanged July 20, but did

not slip too far as many still expect new insight into the central bank's bond

buying plan, set to expire at the end of December, either at the Jackson Hole

symposium in late August or at the next monetary policy meeting Sept. 7.  

     The July 12 yield high of 0.619% was the highest since Jan. 4, 2016, when

Bund yields peaked at 0.627%, the 2016 high. The next level of resistance will

be 0.651%, the Dec. 30, 2015 high. 

     The June 14 low of 0.225% was the lowest since April 20, when yields

bottomed at 0.192%.

     As background, Bund yields fell to a low near -0.161% Sept. 27, 2016,

versus the life-time low around -0.2059% seen July 6, 2016.

     Ten-year UK Gilt yields closed around 1.230%, after trading in a 1.200% to

1.239% range. The July 7 high yield of 1.338% was the highest since Feb. 6, when

yields peaked at 1.370%.

     The June 14 low of 0.923% was the lowest since Oct. 7, when Gilt yields

bottomed near 0.905%.

     On Jan. 26, 2017, 10-year UK yields saw highs near 1.530%, which was the

highest yield since Dec. 15, when yields hit 1.536%, the highest since May 5,

2016, when Gilt yields saw a high near 1.538%.

     Ten-year Japanese government bond yields closed around 0.078%. Yields hit

highs near 0.108% on July 7, which prompted the Bank of Japan to step in buying

bonds, offering to buy 10-year JGBs in unlimited amounts at 0.11%. 

     Current high yields compare to April 20, when JGB yields flirted with

negative territory for the first time since last November and the Feb. 3 highs

near 0.150%, which were the highest since the BOJ introduced negative interest

rate policy back on Jan. 29, 2016.

     In currencies, the dollar struggled to recover Monday.

     The euro was closing near $1.1840, on the high side of a $1.1723 to $1.1845

range. The earlier high was the highest since Jan. 14, 2015, when the pair

peaked near $1.1846.

     The 2015 euro high was $1.2109, seen Jan. 1. And two weeks earlier, on Dec.

16, 2014, the euro peaked at $1.2570. 

     Dollar-yen held around Y110.26, after trading in a Y110.22 to Y110.77

range. 

     The July 26 high near Y112.20 was the highest level since July 20, when the

pair peaked at Y112.42. The earlier low was the lowest since June 15, when

dollar-yen troughed at Y109.27.  

     Dollar-yen bottomed at Y108.83 June 14, the day U.S. 10-year yields posted

their most recent low of 2.103%, and then tracked U.S yields higher, topping out

near Y114.49 July 11, the highest level since mid March, around the same time

10-year yields hit 2.396%. 

     In commodities, spot gold was closing near $1,268.95 per ounce, in the

middle of a 1,265.85 to $1,271.23 range, with the earlier high the highest since

June 14 when gold peaked at $1,280.77. 

     On June 6, the precious metal posted a high of $1,296.15, but then stalled,

creating a double-top with the $1,295.56 high seen April 17. 

     Subsequently, gold moved lower as U.S. Treasury yields and the dollar

recovered,  bottoming July 10 near $1,204.90.

     With the dollar on the defensive in recent sessions, gold has made slow

progress higher. A break above the June 14 highs will target the early June

peaks. 

     West Texas Intermediate saw the first closing settlement above the

psychological $50 mark since May 24. 

     NYMEX September light sweet crude oil futures settled up $0.46 at $50.17

per barrel, after trading in a range of $49.18 to $50.41 (after hours). 

     Most recently WTI topped out at $52.00 May 25, before the announcement of a

nine-month extension of OPEC/non-OPEC production cuts. The extension was largely

priced in and oil fell to $42.05 on June 21. 

     A sustained close above $50 will target the May 25 high. 

     Baker Hughes rig count data, released Friday, showing a two rig increase to

766 rigs for U.S. "oil-only" rigs in the week ending July 28. This is still more

than double the 374 rigs seen a year ago. However, rigs were still down 52.4%

from the peak rig count of 1,609 rigs seen Oct. 10, 2014.

     In U.S. stocks, the Dow Jones Industrial Average posted a new life-time

high of 21,929.80 Monday. The index closed also  at a life-time closing high of

21,891.12.

     On July 27, Nasdaq Composite and S&P 500 posted new life-time highs of

6,460.841 and 2,484.04 respectively, before succumbing to profit-taking,

especially in tech stocks, where earnings were mixed last week. 

     The S&P 500 closed down 0.07% at 2,470.30. At Monday's close, the index was

up 10.3% year-to-date. 

     On the risk front, the CBOE's volatility index or VIX was last around

10.26, on the low side of a 10.23 to 10.84 range. 

     The July 26 low of 8.84 was a new life-time intraday VIX low. The prior

life-time intraday low was 8.89, seen Dec. 27, 1993. 

     The VIX posted a high of 16.30 on May 18 at the peak of risk aversion, not

far from the 16.28 high seen April 17 that was driven by North Korea concerns.

     It would take a close above the 200-day moving average, currently at 12.14,

to suggest risk appetite was waning. The VIX last closed above its 200-day

moving average in mid-May, but then only briefly.

     Looking ahead, Tuesday's U.S. data calendar includes June personal income

and spending and July ISM manufacturing. MNI's median estimates are 0.4%, 0.1%

and 56.3 (down from 57.8 in June) 

     The highlight of the week will be Friday's release of July U.S. non-farm

payroll data. MNI's median estimate is 181,000 for headline payrolls, with a

range of 170,000 to 220,000. The unemployment is seen at 4.3% vs 4.4% last and

average hourly earnings are seen rising 0.3%. Due to a large 0.4% rise in hourly

earnings in July 2016, the year/year gain for July 2017 is likely to be trimmed.

     In other centers, the Reserve Bank of Australia meets Tuesday, with no

change in policy expected. Analysts warned however to be prepared for jawboning

about recent Aussie strength over the psychological $0.8000 mark. See MNI Main

Wire story at 7:16 a.m. ET for detials. 

     --follow MNIEyeonFX on twitter.com --

--MNI New York Bureau; tel: +1 212-669-6438; email: vicki.schmelzer@marketnews.com

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