Ever since the US Fed’s FOMC statement on June 24, we have held a fundamental position that the USD would strengthen vs. EUR and GBP (expressed as lower EUR/USD & GBP/USD). The price action of those two pairs in the last few days has caused us to close down those positions.
Our hypothesis was that when the Fed made clear in their last meeting that they would not raise short-term interest rates by year’s end, that investors would be buying US notes and bonds (which would drive down the yield) and to do that, international investors would need to buy USD first. We did see a strong move in the US Treasuries markets with the US 10 year Note’s yield dropping from just above 4.00% pre Fed announcement to 3.22% just a few days ago. It has since rocketed back up to it’s present 3.65%. So we were correct about the expected move in US Treasuries……but it did not translate into USD strength.
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EUR/USD and GBP/USD have been in a bit of a holding pattern for the last few weeks; like a spring being coiled tighter and tighter. Well now it seems that the spring has been unleashed and we expect that the moves higher in GBP/USD (present bid 1.6509)and EUR/USD (present bid 1.4235) that started late last week will push rather hard for the first half of this week.
We are no longer short either pair, and are waiting for a bit of a pullback in both before entering a long position.
We at Back Bay FX note that we had the fundamentals of the trade correct and the movements in the US Treasuries markets has previously caused a strong move in the USD. Does this mean that a correlation that has been working is no longer a valid market correlation? We will keep an eye on the US 10 year Note yield and USD correlation level to see.