Why tumbling real yields may become a real headache for the DXY index

In the lead-up to tonight's U.S. CPI data, one of the more baffling moves seen in recent times has been the sharp falls in nominal and real U.S. yields, a move touched on in yesterday's article on gold.

FOREX 10

There has been no obvious catalyst for the fall in yields. However, it is notable that the decline has been global. For example, overnight long end yields in Germany and the U.K. declined by 8-11bp while U.S. treasury yields declined by 4-7bp as U.S. 30 year yields reached their lowest level since July.

The fall has been more pronounced in the real yield space (the interest rate adjusted for inflation). This week, U.S. 30 year real yields traded to a record low, and U.S. 10 year real yields broke below the bottom of a well-established range at -100bp, to close overnight at -117 bp, within touching distance of their -119bp low from August of this year.

The decline in yields is more surprising because economic data has been encouraging of late and inflation concerns remain. Most likely, the move is in response to traders unwinding positions after key central banks' meetings last week were dovish compared to market expectations.

Aside from gold, the decline in yields has the potential to impact the FX space. As can be viewed on the chart below the U.S. dollar index, the DXY has closely tracked the move in real yields. It currently appears almost 2% overvalued at its current price of 94.00.

If the DXY index breaks uptrend support at 93.50 coming from the May 89.53 low, it increases the risk of a deeper pullback in the DXY index towards the support provided by the 200 day moving average of 92.00.

DXY index vs US 5yr Real Yields

 

 

 

Source Tradingview. The figures stated areas of November 10th, 2021. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

How to trade with City Index

You can trade easily trade with City Index by using these four easy steps:

  1. Open an account, or log in if you’re already a customer 

    Open an account in the UK
    Open an account in Australia
    Open an account in Singapore

  2. Search for the company you want to trade in our award-winning platform 
  3. Choose your position and size, and your stop and limit levels 
  4. Place the trade

 

  1. Open a Forex.com account, or log in if you’re already a customer.
  2. Search for the pair you want to trade in our award-winning platform.
  3. Choose your position and size, and your stop and limit levels.
  4. Place the trade.

 

 

Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.