Yield Curve and Spreads


Typically, 5 day volatility is seen in any nation upon an interest rate rise or fall as yields and interest rates normalize to new levels. Fed Funds closed today at 0.91 and failed to reflect the new 1.12 expected level. When the Fed raised December 2015, DXY traded 270 pips from 97.22 to 99.32. The BOJ went negative January 2016 and USD/JPY ranged 286 pips from 115.93 to 118.79. The non example is the RBA cut September 2016 as the RBA slashed from 1.75 to 1.50 in a slow series at 10 basis points each time.

Will we see the traditional 5 day volatility is questioned based on the yield curve. 10 year minus 2 trades 0.79. Then the 30 and 10 trades 0.64. The yield curve is flat from both ends. 10 minus 5’s trades 0.41 and 10 year minus 5’s trades 1.05. Most important is the correct 10 year minus 3 month at 1.11. Fed Funds at 0.91 trades above 10’s and 2’s, 10’s and 30, 10’s and 5’s and below 10 minus 3 months.

The middle portion of the yield curve is slightly humped by 32 and 47 basis points which means either a transition to normal or the yield curve inverts. Fed Funds raises normally experiences a short end rise against a long end drop and means an inversion and guaranteed recession ahead.

The pairs to watch for volatility so far are JPY cross pairs in EUR/JPY and GBP/JPY. NZD always contains great potential as NZD mirrors the USD system. The recommendation is  trade NZD/USD and NZD/CHF together.

Brian Twomey

EUR/USD and G10 Pairs: Levels, Ranges, Targets

GBP/USD’s position is at the day’s low of lows at 1.2723 while EUR/USD faces a break line at 1.1191 and most important at 1.1178. AUD and NZD are located at the day’s upper break points at 0.7592 and 0.7261. USD/JPY remains solid at 109.95 and 109.46 but approaches its break line at 110.57 and 110.65. USD/CHf will see its cap at 0.9728.

Today’s market is treacherous as all pairs are contained within about a 40 pip range to its vital upper or lower break points. USD yields reveal Yellen doesn’t raise while interest rates are on the edge. My analysis remains the same since last August, don’t dare raise as Fed Funds is not only overbought by light years but trading at the 10 year monthly average doesn’t warrant a raise. Nor does economics warrant a raise. If Yellen raises anyway, then Fed Funds reversals will come later. I argued against the last raise due to overbought but Yellen hiked anyway. Then what des a raise mean for GBP and Europe. My guess without running the data is deeply oversold interest rates.

AUD/USD is most tough among the pairs as AUD ontains severe range problems. Supports are located at 0.7535 then comes 0.7529 and 0.7516. Above line break today is 0.7592. Problem with shorts is 0.7578 and 0.7573 must break then rising 0.7535. Yet above to lower 0.7600’s, AUD can’t handle such richter scale levels. Higher for AUD relieves the enormous range pressures but 0.7791 is falling by the day. Bad position for AUD. View my blog for all AUD pairs for the week.

NZD/USD Broke 0.7230 and remains the break line to travel lower. Overbought NZD will see a dead stop at 0.7262. The line to cross below is 0.7209 to target another tough line at 0.7199.

EUR/USD is another pair that can’t handle the upper decks. The big line break is located at 1.1261 but 1.1270 and 1.1280’s will see a brick wall. Below 1.1191 and 1.1178 are big breaks and oversold. Don’t expect breaks down here.

GBP/USD must breaks above are located at 1.2743, 1.2777 then 1.2802 and 1.2832. GBP contains good range and abilities to move today.

EUR/JPY. Watch 123.91 and 123.91 big breaks to target 124.26 then 124.59. The downside is wide open to 123.83. Overall break points to see far lower are located at 122.51 then 121.34.

Brian Twomey