20 Aug Prudent to lock in here
After having a rough day yesterday, mortgage bonds are off to the races this morning. They broke above their 100 day moving average and are currently just beneath their 200 DMA. If they happen to muster the strength to break above this critical level, that would be a significant move. However, bonds would need to make a decisive move above this point in order for us to consider this a breakout. Since breakouts are rare, we must assume at this point that bonds will be forced lower at this level. We must remember that last week’s attempt to break out of the channel was followed by nearly a 100 basis point drop within a couple trading days.
China’s currency has declined by 2% over night. This is a result of the Chinese Government purposely manipulating their currency to import some inflation, which in turn exports deflation. In essence, this makes Chinese goods less expensive to other currencies. This should help stimulate an increase in the demand for Chinese goods in the US and in other countries. With China being the second largest economy in the world, this has a significant change to the global economy. It also leaves other Asian countries to consider lowering their currency levels to compete with the move China is making. Also, here in the US, a Federal Reserve interest rate hike would further exacerbate the move China made by strengthening the US dollar. This would make the Chinese currency even weaker and help bolster overseas purchases, which will slow the sale of US products who are fighting to compete with their overseas competitors.
For now, the move made by China is driving mortgage rates lower as well as the stock market. However, this is the time to be very cautious in the market. Although bonds may break higher, until they do the prudent strategy is to maintain a locking bias. If you choose to float, do so carefully while keeping one eye on the bond charts at all times. Should momentum shift negative, as it likely will, lock.