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$35 Billion Three-Year Treasury Notes Auction Puts Pressure on U.S. Dollar

Today's $35 billion three-year Treasury Notes auction is putting some pressure on the U.S. Dollar overnight. Concerns over rising supply and the U.S. ability to fund its growing debt is expected to temporarily halt the correction in the U.S. Dollar. Investors will be watching the auctions this week to see if investors are able to take on the additional supply being offered. In addition, the market will be concerned about how much higher yields will have to rise to satisfy demand.

Although yields are expected to rise as the Treasury increases supply by as much as $130 billion this week, September Treasury Notes and Bond futures are trading higher this morning. This could be because traders have already priced in the increase in supply or because they are waiting to see the actual results rather than speculate ahead of the actual number to be released later today.

Trading in the financial instruments could be choppy this week as there is a debate building as to whether the Fed will have to raise its benchmark interest rate by the end of this year. Many Treasury futures traders feel the call for an increase is premature based on just one better than expected U.S. Non-Farm Payroll Report. The forecast however did gain support yesterday when Nobel Prize Winner Paul Krugman predicted the possible end of the recession by the end of September.

Equity markets are trading better overnight because of the weaker Dollar. Investors are buying higher priced assets as they increase their desire for more risk. The news that some banks are being approved to return TARP money is helping financial stocks this morning.

The big debate at this time is whether money is leaving Treasury instruments and moving into equities. It is difficult to predict at what level Treasury yields will have to rise to keep traders interested. At this time it seems investors are more interested in preserving capital and are abandoning financial instruments as yields rise and debt instruments lose value.

The inability to break the equity markets could begin to force investors to chase stocks especially if the market starts off positive today. For weeks traders have been saying the market is due for a substantial break, but have been unable to break it. Buying is coming in on the breaks and drying up on the rallies. At some point investors who are still on the sidelines may decide to go "all in" and chase the market higher. When this occurs, the top will be most likely made. As long as there are periodic dips in the market then the overbought pressure can be avoided. Keep buying dips as long as this type of trading is being supported.

Technically, the U.S. Dollar is indicating a short-term correction is taking place. However, in order to set up the short-term top, foreign currencies must retest the recent highs in order to establish resistance. This means that a 50% correction of the recent break is necessary. Overnight action indicates this retracement may be taking place. Look for the rally to continue throughout the day especially if news leaks out that the Treasury auction is not going well.

The June Euro is called higher this morning despite a downgrade in the debt rating of Ireland. This rally is more technically based so fundamentals are being set aside at this time.

Political tensions have eased in the U.K. while positive housing numbers were released. These events coupled with the need for a retracement rally are helping to boost the June British Pound overnight.

Stronger crude oil and equities along with the need for a technical retracement is also expected to help boost the June Canadian Dollar this morning.

Overall, the tone in the equity and currency markets should be firmer today as the Dollar weakens. The Dollar will remain under pressure as long as traders remain concerned about the growing supply of Treasury debt. Look for strength in equities and currencies throughout the day as traders anticipate yields to rise with today's auction. Watch late in the day for news from the auction to move the markets.


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