In recent posts we have mentioned the importance of Treasury yields, so I thought it was time to take a closer look at US government debt and the driver of yields going forward.
The reason Treasury yields are important include:
1, They could determine the future direction of USDJPY as the differential between US Treasury yields and Japanese government bond yields are a key driver of this cross.
2, The future direction of yields could have implications for the stock market and for commodity prices. For example, if Treasuries are sold off in favour of stocks pushing yields higher (Treasury prices move inverse to yields) then we may see commodities struggle as corporate funding costs may rise. Since the start of this year, although stocks have moved higher gains in commodities have been more muted and only started to play catch up in recent days.
3, Changes in Treasury yields can have big implications for the direction of the dollar, which in turn can impact the direction of commodities and stock markets.
Potential drivers of yields in the near-term:
1, Economic data in the US: in this regard payrolls and housing data are the key releases to watch out for. Positive economic data surprises tend to push yields higher, while economic misses can weigh on yields as they support loser Fed policy. Due to this, Feb 1st 2013 will be a pivotal day for the Treasury market as Non-Farm Payrolls and ISM manufacturing data points are both released.
2, The Fed meeting at the end of Jan. The statement will be pivotal as no change in rates or policy is expected. It will be interesting to see how the new members of the Fed react; for example, if the new dovish voting members make their voices heard and sound concerned about the impact of social securtity tax rises on consumer confidence and behaviour. Treasury yields are very sensitive to Fed statements, so any sign the Fed is more dovish, or more hawkish could cause volatility in the Treasury market.
3, Currency wars. We have alrerady heard from a German lawmaker who is questioning the BOJ's and the government of Japan's intervention in the yen, saying that Germany could raise the topic of the yen at the next G20 and that Japan's action on the yen risks retaliation. A currency war is considered a form of protectionism, and protectionism can cause risk appetite to drain from markets. If there is a "currency war" and retaliatory action is taken against Japan then we could see investors rush to safe haven assets like Treasuries, that could push down yields. This is a medium-term concern and may not have a big impact on markets in the near term.
The technical perspective:
Chart 1: 10-year Treasury yield, daily chart
As you can see yields may have backed away from the 1.95% highs from earlier this month, but the outlook remains constructive. They held support at 1.84%, and could be in an ascending triangle pattern. A break above 1.9% could open the way for a re-test of 2% in the medium term.
Source: PLEASE NOTE THIS IS A BLOOMBERG CHART AND IS NOT AVAILABLE TO TRADE WITH FOREX.com
Chart 2: 10-year US Treasury yields and USDJPY
As you can see, this cross moves closely with US Treasury yields. A break above 1.9% in the 10-year yield towards 2% could be the driver to get USDJPY above 90.00.
Source: Bloomberg and FOREX.com
As you can see above, the technical outlook for Treasuries is still constructive, thus, if we get some positive economic data out of the US in the coming weeks yields could start to rise towards 2%, which is positive for USDJPY. Obviously, an escalation of currency wars or data misses in the US could hurt this outlook, but for now, Treasury yields suggest that USDJPY is taking a breather and could embark on a leg higher in the coming days and weeks.
Kathleen Brooks| Research Director UK EMEA | FOREX.com
d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e: email@example.com| w: www.forex.com/uk
23 College Hill | 3rd Floor | London EC4R 2RT
Now you can follow us on Twitter: http://twitter.com/FOREXcom
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan. Please read Characteristics and Risks of Standardized Options (http://www.optionsclearing.com/about/publications/character-risks.jsp).