US Treasury yields fell across the curve on Friday as speculation grew that an Iran\u2013Oman agreement over the Strait of Hormuz is close, a development that has weighed on energy prices. A US official said progress had been made and that, once a deal is announced to restore unimpeded shipping, the US Navy would lift the blockade of Iranian ports. West Texas Intermediate extended losses of nearly 1% to $77.50, while the 10-year Treasury yield slipped by nearly three basis points to 4.651%.<\/p>\n\n
Rate expectations also shifted after weak US labour data. Money markets put the chance of a Federal Reserve hike in September at 30%, down from 58% a day earlier, and implied a 70% probability of rates being held, according to Prime Terminal data. July Nonfarm Payrolls fell by 23K versus expectations for an 80K rise, while revisions to May and June cut totals by 103K; the Unemployment Rate edged down from 4.2% to 4.1%. The US Dollar Index fell 0.42% to 99.54, and next week\u2019s focus turns to consumer and producer inflation, jobless claims, and University of Michigan consumer sentiment.<\/p>\n\n
We recommend that derivative traders position for a dovish shift by targeting interest rate futures and options. With the market now pricing in only a 30% chance of a September rate hike, buying call options on 10-year Treasury note futures offers an attractive risk-reward ratio as yields slide toward the 4.5% support level. Historically, similar sharp declines in nonfarm payrolls, such as the major downward revisions seen during past economic slowdowns, have preceded sustained bond rallies.<\/p>\n\n
The slump in the US Dollar Index (DXY) to 99.54 presents a clear opportunity for currency derivative traders. We advise buying call options on the Euro (EUR\/USD) or using short-dollar risk reversals to hedge against further weakness ahead of next week’s inflation data. A cooler-than-expected CPI print next week will likely solidify the Fed’s pause, driving the greenback toward its historical support level near 98.00.<\/p>\n\n
In the energy markets, we should prepare for further downward pressure on West Texas Intermediate (WTI) crude. If the Iran-Oman shipping deal is finalized and the US Navy lifts the blockade, an influx of supply could easily push WTI well below its current level of $77.50. Bearish traders should consider buying near-the-money put options on WTI futures to capitalize on this supply-side pressure while managing risk.<\/p>\n\n\n\n