One of the surest predictors in the financial markets is accurate more than 98% of the time in the front-month contract. It's a futures market you should watch closely if you want to know how far and in which direction interest rates are likely to go.

That market is the

federal funds futures contract traded at the Chicago Board of Trade, and it appears poised for a rate cut.

Traders of the contract have been increasing the odds in recent sessions that the

Fed

will cut rates next week and in coming months. The April

fed funds futures

contract (FFJ3:CBOT) has broken out of a consolidation pattern to a contract high, pricing in as much as a 60% chance of a 25-basis-point cut, which would drop the overnight lending rate to 1%.

The

June contract

(FFM3:CBOT) reflects traders' belief the Fed will have definitely cut rates to 1% by the following meeting on May 6. They've completely priced into the futures an implied federal funds target rate of 1%.

The

July contract

(FFN3:CBOT) is pricing in a 25% chance of an additional 25-basis-point cut to 0.75% by the completion of its meeting ending June 25. The low odds reflect the uncertainty of the move.

Although rate cuts are having less of an impact on the economy as short-term interest rates approach zero, a cut is still likely to have bearing on the direction of related debt futures and currencies contracts. Reports that the Fed might begin buying Treasury notes in an attempt to lower longer-term rates, stimulate the economy and nip

deflation

are also positive for debt and foreign currency futures.

Barring inflation, higher fed funds futures prices are bullish for debt futures. Treasury note purchases by the Fed would also be bullish for longer-term debt futures, since the government's deep pockets would seriously ramp up demand.

These new fundamental developments bolster the view that June

T-bonds

(USM3:CBOT) will fulfill the

measured move out of their

momentum setup highlighted here last month. The developments are also positive for June

10-years

(TYM3:CBOT), the market which would most directly reflect Fed purchases of Treasury notes.

The Buck Doesn't Stop Here

A lower fed funds interest-rate target and central bank-directed purchases of T-notes are also fundamental negatives for the dollar. Lower short-term U.S. rates relative to rates in other countries spur sales of dollars. At the same time, this stimulates purchases of the foreign currencies underlying higher-yielding debt instruments abroad.

A Treasury note- and bond-buying spree by the Fed would be negative for the dollar. When the Fed buys Treasuries, it pumps dollars into the economy, increasing the supply of greenbacks available for circulation. As the supply of dollars increases, their price declines.

March

dollar index futures

(DXH3:NYBOT) are currently one of the leading downside momentum markets among the most widely followed futures contracts. At the same time,

euro FX futures

(ECH3:CME), the currency most heavily weighted in the basket that trades contra to the dollar index, is trading at a contract high.

March

Swiss francs

(SFH3:CME),

British pounds

(BPH3:CME),

Canadian dollars

(CDH3:CME) and

Japanese yen

(JYH3:CME) all hit fresh 10-day highs in signs of revived momentum. Their collective strength is also negative for dollar index futures.

Pigs at the Trough

April

hogs

(LHJ3:CME) have completed a measured move down out of a head-and-shoulders top pattern and possibly a five-wave Elliott pattern down. Last Thursday, hogs spiked into the October 2002 consolidation, a potential exhaustion thrust that might have caught participants looking to sell the breakdown of the new one-month low with new short positions. This sets up the real possibility of a short squeeze and the expectation that hogs will retrace to the 53.300 or 54.000 levels.

Marc Dupee is an independent trader and co-author of the book

The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he was long March 10-year notes, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to

Marc Dupee.

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