Stage 1: Bonds turn up [stocks and commodities falling]
Stage 2: Stocks turn up [bonds rising, commodities falling]
Stage 3: Commodities turn up [all three markets rising]
Stage 4: Bonds turn down [stocks and commodities rising]
Stage 5: Stocks turn down [bonds falling, commodities rising]
Stage 6: Commodities turn down [all three markets fall]

It would seem that we are slipping into stage 6. QE2 has grossly distorted the clear identification of the classic stages through a suppression of interest rates, which would normally rise as Bond Par’s fell. That the falling demand, which would drive this process, has been picked up by the Federal Reserve to the tune of $19 Billion -a – week POMO stands as evidence.

The US dollar stands as proxy for rising interest rates. If interest rates rise, gradually foreign investment flows into the debt market as and when US rates on a risk adjusted, inflation adjusted basis exceed returns elsewhere. As the US is still AAA credit rated, even though interest rates are not yet rising due to the death throes of QE2, without a QE3, interest rates along the yield curve will rise. Hence the early traders in the US dollar are playing this trend.