Inside the Currency Market by Brian Twomey

Author:Brian Twomey
Language: eng
Format: epub
Publisher: Wiley
Published: 2011-09-21T16:00:00+00:00

Euro/U.S. Dollar and U.S. Treasury Bond Yields

Notice Exhibit 6.5, the chart of the three-month Treasury Bill and two-year Treasury Note along with spreads of each, and further notice Exhibit 6.6, the historic euro/U.S. dollar chart marked exactly as the Treasury chart.

EXHIBIT 6.5 Three-Month, Two-Year Treasury Yield Curve

Source: The Chart Store, permission by attribution.

EXHIBIT 6.6 Historic Euro/U.S. Dollar Chart

Source: Net Dania, permission with attribution.

From 2000 to 2002, yields for both were down but so were the spreads and the euro/U.S. dollar hardly moved. Yet notice the almost 7 percent yield payout for the two-year note and three-month bill. This explains the no-movement aspect. The payout is too expensive for the short end of this curve, especially if present interest rates and reserve requirements aren’t in sync to the 7 percent yield.

From 2002 to 2003, yields and spreads were down and the euro/U.S. dollar began its ascent. From 2003 to 2006, yields were up, spreads were down and the euro/U.S. dollar trended. In 2007 to 2008, the euro/U.S. dollar followed the yields of both, but the spreads rose as well. This set the euro/U.S. dollar up for the 2008 to 2009 fall. Notice further how the spreads leveled and caused uncertainty of direction.

The perfect scenario to trade the three-month Bill against the two-year note occurs when yields are low and trending up and spreads between both decrease, such as the 2003 to 2006 example. For the euro/U.S. dollar, this represents a trend on autopilot. A leveling of spreads says indecision and market uncertainty. Notice the low present yield of both Treasury instruments and leveled spreads. Market uncertainty says either a small trend will occur or yields and spreads will remain low over time due to economic conditions and the uncertainty of future rates. Present economic conditions do not give a reason for the euro/U.S. dollar to move. This is a no-trade condition. Yet here is the point to now look at the middle or long end of the curve for directional guidance.

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