The difference between USD and German Yields 2 to 10 year for EUR/USD is USD provides prediction for tops and the distance from USD alone is extraordinarily wide from EUR/USD current price. German yields forecasts bottoms and on its own volition, the distance is extraordinarily wide from EUR/USD current price. If German minus USD yield spreads are factored to current EUR/USD at the 1.0931 close then the distance to current price becomes even greater than yields factored by themselves. The same principle holds for USD minus German yields, a EUR/USD price fails to be found yet ranges were known. Yields were matched as 2, 3, 5, 7 and the 10 year.
If German yields either refactored to interest rates from spreads or on their own against USD then again a EUR/USD price is not found. A foreign bond trades 0.01% yet USD is quite different.
To understand distance as a USD example, 30 year Treasury yield is priced in 32nds and priced at $312.50 for each 32nd or $3,000 per point. One basis point on a 10 year bond is $1000.
From fraction to decimal,
1/32 = 0.0313,
3/64 = 0.0469,
1/16 = 0.0625,
5/64 = 0.0781.
At 63/64 = 0.9844 then comes 1.0 as a fully traded basis point.
From Fraction to percent,
1/32 = 3.125%
3/64 = 4.687%
1/16 = 6.25%
5/64 = 7.812
63/64 = 98.437%. Then 1.0 as a fully traded basis point.
The average for USD yields is 1.8120 while the German average is minus 0.2494 or 0.7506 as an interest rate. The Correlation between USD and German yields factors to 0.96% and R2 at 90%. The Correlation range is narrow at the 0.97% upper richter scale limit and lower bound at 0.57%. Narrow defines USD Vs German yields range from 1.6847 to upper level at 1.9391. German yields Vs USD ranges from minus 0.3797 to minus 0.1201. Both USD and German yield distances statistically from upper to lower runs 0.25 yet distance between both runs 0.125.
Current USD and German yields are tightly married and warns of a huge breakout. Until the breakout materializes, EUR/USD will range from 1.0800 to 1.1100. The noted point to yield marriage is we’ve seen this story many, many times before. While 1.0800’s to 1.1100’s are current range break points, actual trade ranges in the last 4 weeks traded 178 pips, 122, 225 and 168.
USD
2y at 1.29 X 1.0931 = 1.4100 EUR/USD. Then 1.29 Divide 1.0931 and 1.0931 divide 1.29 = 1.1801 and 0.8473. Mid point = 1.0137.
3y at 1.48 = 1.6177 EUR/USD. Then 1.48 divide 1.0931 and 1.0931 divide 1.48 = 1.3539 and 0.7385, Mid point 1.0462.
5Y at 1.84 = 2.0113 EUR/USD. Then 1.84 divide 1.0931 and 1.0931 divide 1.84 = 1.6832 and 0.5940. Mid Point 1.1386.
7Y at 2.13 = 2.3283 EUR/USD. Then 2.13 divide 1.0931 and 1.0931 divide 2.13 = 1.9485 and 0.5131. Mid point 1.2308.
10Y at 2.32 = 2.5359 EUR/USD. Then 2.32 divide 1.0931 and 1.0931 divide 2.32 = 2.1224 and 0.4711. Mid Point 1.2967.
Synopsis. 3 and 5 year yields currently dictate EUR/USD. Factor 3 and 5 year yield spreads then EUR/USD bottoms are located from 1.0275 to 1.0568.
German.
2Y at minus 0.665 = 0.4281 EUR/USD. Cross divide = 0.6083 and 0.4281. Mid point 0.5182.
3Y at minus 0.662 = minus 0.7236 EUR/USD. Cross divide = 0.6056 and 1.6512. Mid Point 1.1284.
5Y at minus 0.316 = 0.7771 EUR/USD. Cross divide = 0.2890 and 0.7771. Mid point 0.5330.
7Y at minus 0.036 = 1.0571 EUR/USD. Cross divide = 0.0329 and 1.0571. Mid Point 0.5450.
10Y at 0.392 = 0.4284 EUR/USD. Cross divide = 0.3586 and 2.7885. Mid Point 1.5735.
Synopsis. Despite appearances at the 5 year, EUR/USD price is absolutely dictated by the 3 and 5 year yields. The 5 year is most crucial as it informs not only the EUR/USD top but if EUR/USD breaks above then light years of distance exists to EUR/USD maximum at 1.1700’s. Further, a break above the 5 year would create massively wide EUR/USD ranges and increased volatility.
Currently, the 5 year and EUR/USD are both at uppermost inflection points. Why the massive distance on a break of the 5 year is because the 7 year yield is far to high. The 5 year is not expected to break because the 7 year purpose at current price is designed to contain EUR/USD and the 5 year to maintain a lower EUR/USD.
Further, the 3 year yield offers far more downside to EUR than the 5 year offers on the upside break. The 2 and 3 year are extremely close to bottoms and explains why we’ve heard recent ECB speakers speculate on interest rate rises. The crucial ECB question is would the ECB allow a higher EUR on a rate hike as lower yields would also rise. Or would the ECB raise after Yellen so a rise would allow EUR to start from a lower base due from Yellen.
Overall, yields contain deceptive qualities as 1 or possibly 2 yields may be to high or to low in relation to each other as is the 35 basis point case in the 3 to 5 year. From the 5 to 7 year yield offers 28 upside basis points while 35 is current distance from the 5 to 3 year. Statistics offer a more solid revelation at a 0.25 range and 0.125 intervals between USD and German.
Brian Twomey
Tianzuida ON TRADING 