Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets_2

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Trading Strategies for the Global Stock, Bond, Commodity, and Currency Markets_2 THE DOLLAR VERSUS TREASURY BILL FUTURES 8382 THE DOLLAR VERSUS INTEREST RATES AND STOCKSin the dollar by two months. While the direction of interest rates is important to the FIGURE 6.8dollar, its also useful to monitor the relationship between short- and long-term rates BOND PRICES VERSUS THE DOLLAR FROM 1987 TO 1989. BOTH MARKETS RALLIED TOGETHER FROM EARLY 1988 TO 1989. THE BULLISH BREAKOUT IN THE DOLLAR IN MAY OF 1989 CO-(the yield curve). Having considered interest rate yields, lets turn the picture around INCIDED WITH A BULLISH BREAKOUT IN BONDS.now and compare the dollar trend to interest rate futures, which use prices insteadof yields. Bond Prices versus the DollarTHE DOLLAR VERSUS BOND FUTURESA falling dollar is bearish for bonds. Or is it? Well, yes, but only after awhile. Figure6.7 shows why it can be dangerous to rely on generalizations. From 1985 to well into1986, we had a rising bond market along with a collapsing dollar. Bond bulls werewell-advised during that time to ignore the falling dollar. Those bond traders wholooked solely at the falling dollar (and ignored the fact that commodities were alsodropping) probably left the bull side prematurely. From 1988 to mid-1989, however,FIGURE 6.7THE DOLLAR VERSUS BOND PRICES FROM 1985 TO 1989. FROM 1985 TO 1986, THE BONDMARKET RALLIED DESPITE A FALLING DOLLAR. BOTH RALLIED TOGETHER FROM THE BEGIN-NING OF 1988 THROUGH THE MIDDLE OF 1989. A FALLING DOLLAR IS BEARISH FOR BONDS,AND A RISING DOLLAR BULLISH FOR BONDS BUT ONLY AFTER AWHILE. Bonds versus the Dollar we had a firm bond market and a rising dollar. Figure 6.8 shows a fairly close cor- relation between bond futures and the dollar in the period from 1987 through 1989. The bullish breakout in the dollar in the spring of 1989 helped fuel a similar bullish breakout in the bond market. THE DOLLAR VERSUS TREASURY BILL FUTURES Figures 6.9 and 6.10 compare the dollar to Treasury bill futures. It can be seen that the period from early 1988 to early 1989 saw a sharp drop in T-bill futures, reflecting a sharp rise in short-term rates. A strong inverse relationship between T-bill futures and the dollar existed for that 12-month span. This also shows how the dollar re- acts more to changes in short-term interest rates than to long-term rates. It explains why T-bill and the dollar often trend in opposite directions. During periods of mone- tary tightness, as short-term rates rise, bill prices sell off. However, the dollar rallies. During periods of monetary ease, T-bill prices will rise, short-term rates will fall, as THE DOLLAR VERSUS TREASURY BILL FUTURES 8584 THE DOLLAR VERSUS INTEREST RATES AND STOCKS FIGURE 6.10FIGURE 6.9 THE U.S. DOLLAR VERSUS TREASURY BILL FUTURES PRICES IN 1988 AND 1989. FALLING T-BILLTHE U.S. D ...