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BofA Says Bearish Bonds Means Bullish Greenback

US Treasuries are breaking out, according to BofAML's Macneil Curry, which is very supportive of the US dollar (especially against the JPY and EM FX). The only caveat, he warns, keep a close eye on fixed income volatility...

 

Via BofAML,

5yr Treasuries are breaking out. This is supportive of the US $ against ¥

US Treasuries yields are on the move, resuming their long term uptrend.

Our focal point for this move is 5yr yields which have broken out from a 1yr range trade and resumed their long term bear trend, targeting 2.025%/2.055% and eventually 2.18%/2.25%.

This should help propel the US $ higher and maintain its long term bull trend.

Looking at a weekly chart of the US $ Index, the trend is on track for long term targets between 89/91, particularly as the weekly ADX is breaking out through 6yr trendline resistance (meaning the trend has further room to run). In the very short term, however, we could see a period of pause in both the US $ bull trend and the advance in treasury yields as 2yr yields are testing a confluence of l/term support at 58.9bps/61.1bps and the US $ Index is testing the Jul'13 highs at 84.75. But we must stress that this should be a temporary pause and ultimately a buying opportunity.

In particular we think that the next bout of US $ strength is likely to come against EM FX.

$/¥ should also continue to appreciate, with a break of 108.95/109.00 exposing 12yr trendline resistance at 109.31 ahead of 110.67 and eventually beyond.

One CAVEAT keep a close eye on FI Vol.

A spike in the MOVE Index could lead to a nasty corrective snap back, albeit a snap back to buy $/¥; especially if 107.49/50 holds.