Wednesday March 22, 2006 - 11:05:59 GMT
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Black Swan Capital - www.blackswantrading.com
â€śI've never understood attempts to deconstruct the yield curve. It is what it is. A is A. It matters very little why long rates have resisted the pull of short rates higher. The fact that the policy rate (the overnight federal funds) rate is 350 basis points higher than it was in June 2004 while the market rate (the 10-year Treasury note) is virtually unchanged is all the information one needs.â€ť
Metals have been holding up quite well lately relative to the so-called commodity dollars i.e. Comdols. A divergence has been playing out lately. Itâ€™s grown quite wide over the past week. It begs the question: Who leads and who follows?
If we step back a bit and view the same chart on a weekly basis, it appears (key word that means may or may not have any significant correlation other than what we want to see) Comdols were leading the metals higherâ€¦
This brings us back to a theme we touched on a couple of weeks ago suggesting central bank tightening, or the expectation of more tightening, may be tamping down on the speculative premium in these markets. The Comodols are/were extremely attractive on a yield basis to other currency competitors. They were the darlings of the carry-trade crowd.
(A specific point on copper: New highs in copper and Phelps Dodge have been consistently "confirmed" by one another along the way--in an effective Dow Theory-like manner. But we recently got a new high in copper that hasn't been quickly confirmed by a new high in Phelps Dodge. It is something to keep an eye onâ€¦)
If Comdols are leading metalsâ€”it could get a bit nasty for a whole new segment of buyers that have followed the drumbeat of gurus into gold and assorted sundries. But maybe this move is Comodol specific, as yield competition rises. The gift of hindsight will once again tell the story. For now, if you are loaded with metals, maybe it makes some sense to at least tighten up those stops.
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