USD and German 10 year yields: The Price Drivers for the Week
From current price at 2.347, note the current USD Yield lineup from 10 year averages to 1 year. 3.16, 2.31, 2.41 and 2.16. Viewed from 1 to 10 year: 2.16, 2.31 ( 5 Y), 2.41 ( 2Y) and one year at 2.16. Current price trades at 2.347 in a misplaced distribution yet in a 10 basis point range between the mispriced 2 and 5 year averages from 2.41 – 2.31. The 5 year average should be higher as it crossed below the 2 year viewed from averages 1 – 10. However its viewed, the 10 year yield price is not only contained in a tight range but 2.41 must break higher to see wider ranges between 2.41 – 3.16 or 2.31 breaks lower to see ranges between 2.16 – 2.31. The 1 year average at 2.16 and 5 year at 2.31 are not only oversold but its a trend in its beginning stages. The 1 year average sees its extreme top of the price distribution at 2.87 and 3.80 for the 5 year at 2.31.
The German 10 year yield, exact counterpart to USD, is a distribution more perfectly aligned as averages 10 to 1 year arange from 2.657, 1.651, 1.091 and 0.596. Current price at 0.797 ranges between the 1 and 5 year averages between 0.596 – 1.0919. In terms of the entire distribution, oversold is seen most at the 10 year point at 2.657 yet not oversold to any extremes. The 1 year average at 0.5963 is slowly approaching overbought as prices risers are seen. The top of the price distribution is found at 1.375 to offer context but that top would result in a break of the 2 year average at 1.0919. The top is not likely to be seen anytime soon particularly as European interest rates Eonia and Euribor continue their downward trend.
The USD yield 2 year average at 2.41 is key for the EUR/USD as the Correlation is running at 0.79% and 0.50% for the 5 year average at 2.31. EUR/USD correlations are quite higher for USD yields than German bunds as the 1 year average German Bund correlates to 0.67% and higher at 85% for the 2 year average. Tight Correlations for EUR/USD is due because the German V USD yield Correlations are running high. The 1 year Correlations are running at 89%, 2 year at 93%, 5 year 65% and 10 year at 87%. A 79% EUR/USD Correlation is also found in the Bund / Treasury Spread at the 2 year average and negative from the 1- 10 year averages in the Treasury / Bund Spread.
Its a tight market in terms of yields and the EUR/USD because hardly a price variation exists. It explains not only the slow grinding price moves in EUR/USD but 1 year volatility is running at a paltry 1.5%. The point at 2.41 is key for the market to see volatility again but its imperative to see a break higher if EUR/USD is to resume its downtrend. A break above will see the EUR/USD downtrend gain speed as volatility will spike higher. Focus this week should be 2.41 as that point will break the Correlational logjam.
Brian Twomey, Inside the Currency Market, btwomey.com