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Yields and USD decouple

Friday 19 June 2020 16:07 BST

Interest rate differentials are no longer having a substantial impact on FX markets, according to George Davis, Chief Technical Strategist at RBC Capital Markets.

Looking at a Chart of the USD (DXY) against yield spread differentials (US 10-year versus rest of the DXY basket), Davis says the USD has been more resilient than yield spreads would normally suggest. He thinks this is because risk-off periods typically lend support to the USD and may also come from most global central banks converging interest rates towards zero.

 

 

Moreover, the spread between the US 2-year and US 10-year rates is also exerting less of an impact on the USD than it has been doing for the last three months (Chart 2).

 

Focusing on US yields, Davis thinks there is a significant risk of flattening for the US 2s-10s curve; a daily close below trendline support at 41bps would trigger a bearish trend reversal that would target 37bps (the 38.2% Fibonacci retracement of this year’s rally) and thereafter 34bps (Chart 3). He says a bearish divergence between price and the RSI lends support to this view.

 

See Chart 1 / Chart 2 / Chart 3.

 

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