As we enter the 2nd half of the trading year, expectations in the G7 economies are low, very low. I’m not just talking about the World Cup either, but expectations for job creation and economic growth in the world’s largest industrialized countries. The G-20 meeting this weekend, if it did anything, reinforced those expectations. Europe and the US could not fully agree on how to stimulate their economies, while China went home knowing that they outwitted their Western peers.
It’s not just me stating this; it’s the markets’ interpretation as well. On Friday the US 2-year yield closed at 0.65%. The US 10-year yield happened to close above 3%, but it has been knocking on that 3% door for some time now and one has to wonder if a poor NFP report this Friday will be the catalyst for a move below 3%. If you consider a general rule that yields should reflect economic growth and inflation, then there is little to rejoice about ahead. Interestingly enough, AAA-rated 10-year municipal bonds have an average yield of 3.13%, only slightly higher than the 3.11% Treasury yield. The worries over municipalities have been spelled out quite clearly ever since Warren Buffet’s testimony on Capitol Hill a few weeks back.
Click on the chart below of the US 2-year yield, courtesy of the Wall Street Journal:
The time frame covers the last year and you can see that the current yield is matching the lows that it set in late November of last year. By the way, the MACD did a nice job of calling that bottom – as it did again this past March – although it failed in late May a few weeks ago.
I am not suggesting that you start trading the 2-yead bond, nor am I trying to offer investment advice. As a currency trader I am pointing out the amount of volatility that remains ahead. How would you characterize the month of June so far in Forex – choppy? I just pointed out that the MACD in the 2-year failed for the past month. Any coincidence?
How about Forex trade this past April and May, when EUR/USD traded down from 1.35 to 1.22, which was an optimal market for trend followers. Back to the chart above, the MACD also shows a trending market as the MACD line crosses the signal line. Thus the correlation between the two markets was high.
Although you may not trade other markets, you should be aware of developments that will impact the currency markets. Of course it would be best to pay attention to interest rate differentials and not just the change in nominal yields, but this is one place to start.
Now for the volatility ahead, do you think that the 2-year yield will remain at 0.65% for long? Expectations are low for Friday’s NFP report. In fact, at the time of writing the consensus is calling for a loss of 110k jobs. Given the standard error in NFP forecasts, look for fireworks to return to currency trading in the not too distant future.
This report is for your information only and does not constitute investment or business advice or an offer to buy or sell securities.
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.