1:45 pm EDT:  The US Dollar Index has approached critical resistance that we’ve been writing about (81.90 to 82.00) and we will continue to monitor, as a break through could put a temporary halt to the current equities rally.  While the world is largely focused on Portugal, the Yen is universally weaker as a result of actions by the Japanese government that are de facto monetization of their long bonds.  This is helps explain why the EuroYen is higher in the face of a rising Dollar.  The Yen is simply weaker right now than the Euro, so the EuroYen may not be a leading indication of risk preference today. 

The normally stable spread between US and Japanese long bonds has also been sharply skewed, which explains the selloff in US 30 Year T-Bonds and spike in yields.  Low demand in the 5 Yr auction further spiked yields initially, but they are now retreating.  The price pattern on the intraday yield chart is usually associated with topping, but it looks like the 30 Year will close over a long term trendline on the daily, so there could be upside follow through despite heavy overhead resistance.  Markets are very sensitive to interest rate shocks because the bets are so heavily leveraged (notionals approach half a quadrillion USD).  

We wrote this morning that the rally in equities is still intact as long as ~1157 in the ES holds.  However, we would not go bottom fishing with day trades below 1160.75, which was the lower end of the projected range from the morning report.  All in all, the markets are at a critical juncture, but appear to be holding on for now.

The Precise Take – Equity futures down marginally on surging US Dollar

Leaders Analysis:  Overnight, the US Dollar Index finally broke through resistance and its six week trading range on a ratings downgrade of Portugal.  It has advanced nearly to critical resistance we outlined yesterday, from 81.90 to 82.00, which we speculated it may not be able to breach.  The EuroYen and 30 Year T-Bond yields are confirming this theory so far as they are both up, when existing correlations would have them down.  Having said that, it’s a bit early to become to emboldened in this claim until we see what price actually does if and when it reaches the resistance level.  Because of the mixed signals, for today, the leaders are equities neutral.

Medium Term Analysis:  Durable goods was a non-event, coming in positive but in the middle of the consensus range, so focus returns to the Eurozone debt and Friday’s GDP.  Next week will feature the end of the quarter with its accompanying window dressing and will close with the Employment Situation.  Equities should be able to increase their gains, but we will keep a close eye on the Dollar, as further strong advances could limit upside potential.  The ES has a well formed high volume area (highlighted below in blue) that should serve as good support.  Any venture below…

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