US05Y-EU05Y difference in bond yields as advance warning
Advance warning of longer term swing in EURUSD Forex pair thanks to difference between US 5 year yield and EU 5 year yield.
The challenge is, while it can point to an upcoming longer shift, it's still not going to tell you the perfect timing for the about face. It of course is not the only thing that will contribute towards a shift in the currency pair, but it is one of the fundamental underlying reasons why shifts can occur, especially during a short term interest rate hike cycle, ultimately leading to an inversion of the shorter term yields above the longer term yields which is what we have today.
First, the 2 year yields and shorter, while good to watch for the rate hike cycles, they can take more time to pick themselves off the mat before an about face. 10 year and higher yields may also change a little too slowly to act as a good signal. The difference between the two 5 year yields seem to be a pretty decent middle ground, though.
For example, below is US02Y-EU02Y:
The most glaring is in 2021, the about face in EURUSD effectively has already happened by the time the difference between the 2 year yields starts showing upwards movement signifying the US 2 year yield is increasing more than the Euro 2 year.
The 10 year, you can see after the US 10 year gets ahead a decent amount, the difference between it and the Euro 10 year flattens out and becomes unclear on signaling the pending reversal that happened in 2022 as EURUSD hits an all time low.
Whereas, back with the difference between the 5 year yields, you can see a clear divergence start several weeks before the EURUSD price shift. With that in mind, the difference in favor of the US yields has been trending up since April while the Euro ping ponged higher somewhat slowly. We may be at the point where the USD resumes its role as wrecking ball, going against the simple channel analysis I bought up just a couple days ago.
A part of me still thinks the Euro has another brief rally back upwards left in it before this confirms and the Euro devalues vs. the dollar on a longer term swing. So, I'm still considering long Euro for now, but if the trending difference between the 5 year yields continues in the meantime, it will be time to flatten and reverse that position.
The challenge is, while it can point to an upcoming longer shift, it's still not going to tell you the perfect timing for the about face. It of course is not the only thing that will contribute towards a shift in the currency pair, but it is one of the fundamental underlying reasons why shifts can occur, especially during a short term interest rate hike cycle, ultimately leading to an inversion of the shorter term yields above the longer term yields which is what we have today.
First, the 2 year yields and shorter, while good to watch for the rate hike cycles, they can take more time to pick themselves off the mat before an about face. 10 year and higher yields may also change a little too slowly to act as a good signal. The difference between the two 5 year yields seem to be a pretty decent middle ground, though.
For example, below is US02Y-EU02Y:
The most glaring is in 2021, the about face in EURUSD effectively has already happened by the time the difference between the 2 year yields starts showing upwards movement signifying the US 2 year yield is increasing more than the Euro 2 year.
The 10 year, you can see after the US 10 year gets ahead a decent amount, the difference between it and the Euro 10 year flattens out and becomes unclear on signaling the pending reversal that happened in 2022 as EURUSD hits an all time low.
Whereas, back with the difference between the 5 year yields, you can see a clear divergence start several weeks before the EURUSD price shift. With that in mind, the difference in favor of the US yields has been trending up since April while the Euro ping ponged higher somewhat slowly. We may be at the point where the USD resumes its role as wrecking ball, going against the simple channel analysis I bought up just a couple days ago.
A part of me still thinks the Euro has another brief rally back upwards left in it before this confirms and the Euro devalues vs. the dollar on a longer term swing. So, I'm still considering long Euro for now, but if the trending difference between the 5 year yields continues in the meantime, it will be time to flatten and reverse that position.
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