EUR/USD, German and USD 10 and 2 Year Yields
Posted by Brian Twomey on May 18, 2015 at 1:13pmView Blog
EUR/USD Vs German Yields 10’s and 2’s and USD 10’s and 2’s
The USD 2 year yield currently trades in a larger range between 1.671- 0.395, both encompass the 5 and 10 year averages at both range extremes. The current price at 0.54 sits just above the 1 year average at 0.537 while below is the 2 year average at 0.445. Both the 1 and 2 year averages crossed above the 5 year at 0.39 so within the larger 10 and 5 year range is found the 1 and 2 year averages. A break of the 1 year average at 0.537 would see a range between 0.537 – 0.445 just below at the 2 year. If price remains above the 1 year average then the range becomes 0.537 – 1.6717.
The targets for all averages reveal the 2 year will remain rangebound as the 10 year average is middle bound in its range while the 2 and 5 year averages are approaching overbought. The 1 year average is not only oversold but if price holds above then its a trend just beginning. The targets start at 0.543, 0.555, 0.604 and 0.650. The correlations in the 2 year Vs EUR/USD remain negative throughout all averages and a correlational break is not seen anytime soon.
German 2 Year Yield
The current price at -0.194 trades just below the 1 year average at -0.108, next above is the 2 year average at 0.02, the 5 year at 0.33 and 10 year at 1.57. The wider regression range in the 1 year Vs EUR/USD is found between a top at 0.15 and bottom -0.209. To offer context to the topside range, the 2 year at the 10 year average targets + 0.023 but that target assumes the 2 year average breaks at 0.020. Its not likely to see positive yields unless the ECB eliminates its negative interest rate policy, adopted since September 2014. Further, targets from the 1 – 5 year averages all reveal yields remain negative. The targets from the 1 year are located at -0.21, 2 year at -0.13 and 5 year at -0.196.
The current EUR/USD rise is directly attributable to not only prior oversold yields from the 1 – 10 year averages but the correlations in the 1 and 2 year averages assisted in EUR/USD prices. The oversold yield condition is now relieved and current correlations however in the 1 and 2 year averages are at peaks which means EUR/USD will struggle to go higher from the German perspective but USD yields offer a different scenario.
USD 10 Year Yield
The 10 year yield offers averages from 10 – 1 year at 3.19, 2.35, 2.43 and 2.20. A crossover ocurred at the misaligned 2 year average as its position is above the 5 year. The current 10 year yield at 2.14 still remains below all averages with a must break at 2.20 to see a range between 2.20 – 2.35. Despite positive correlations Vs EUR/USD, targets from 1 – 10 year averages reveal significant breaks at 2.20 are not ready to be seen. The targets from the 10 year are located at 2.15, 1.81, 2.11 and 1.92.
German 10 Year Yield
The 10 year averages from 10 – 1 year align as 2.69, 1.71, 1.17 and 0.68. Targets from 10 – 1 year are located at 1.52, 0.94, 0.60 and 0.33 at the 1 year. Again correlations are positive vs EUR/USD.
From averages 10 to 2 year, German spreads are found at 1.52 and 2.01 from the 10 – 1 year. USD from 10 – 2 year averages are located at 0.76 and 0.99 from 10 – 1 year. From current market perspectives, the USD 10 to 2 spread is found at 1.63 vs German spreads at 0.47. The 10 year to 3 month from the USD side is 2.16 Vs 0.28 from Germany, a favorable USD condition. But 10 to 3 month views normally reveal the domestic interest rate or at least a proximity. Current Fed Funds just achieved its Effective rate at 0.13 on April 13 and has only closed below 2 times since.
While the USD 2 year remains negative and German 2 year positive, EUR/USD correlations remains positive and quite healthy at both 10 year yields. Typically, positive correlations is a condition that normally doesn’t hold for long periods particularly as we see EUR/USD yearly volatilities at just over 3%. Trends and trends with power normally see higher volatilities. At EUR/USD 3% is quite low.
Extra for Fxstreet interested. Correlations is a trade strategy by itself. Big banks that trade interest rates trade by correlations. They do this by Volatility triangles, Volatility/ Correlation Triangles and volatility triangles to factor forward volatility. Triangles because financial instruments, currency pairs whatever can be viewed, compared, analyzed, traded as a trio or compared to each other. What is seen in EUR/USD from the German 2 year yield for example from triangles is the EUR/USD price is not keeping pace with the 2 year German yield. It lags and is lagging more and more. That says a top is far away.
From current 1.1400, next vital points above are found at 1.1422, 1.1451, 1.1502,1.1559, 1.1597, 1.1618 and 1.1658. Shorts must see breaks lower at 1.1399, 1.1347, 1.1306 and 1.1293. The most significant EUR/USD point is found at 1.1293, a rising line. A break of 1.1293 targets next levels at 1.1242, 1.1240 and further down at 1.1063, 1.1047 and 1.1038. Current EUR/USD prices are driven by oversold intermediate averages. Longer term averages are middle range to overbought and achieve more overbought with further prices rises.
Published FXStreet.net May 18 2015
Brian Twomey, Inside the Currency Market, btwomey.com