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Increasing Yields Benefit the Greenback

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Increasing Yields Benefit the Greenback

The dollar benefited from an increasing yield differential which drove the forward curve in the US’s favor making more difficult to sell the US currency. The yield differential is generally highly correlated to a currency pair’s performance and the increase has benefited the greenback.

The 2-year spread between US and German rates doubled to 15 basis points from a little below 8 basis points at the end of last week. The widening of the spread has resulted from both the increase in US 2-year yields and a decline in German 2-year yields in roughly equal measure. Despite this movement and the increase of US 10-year yields, the longer term differential remained unchanged.

The UK reported a second look at Q3 GDP which was left unrevised at 0.8%, but the year over year rate was revised to 1.9% from 1.5%. The Q3 current account deficit increased to 20.7 billion pounds from a revised 6.2 billion pounds in the second quarter. The Q2 revision was for nearly 7 billion improvements, while Q3 was about 7 billion larger than anticipated.

The Bank of Japan keeps interest rate policy unchanged as expected. The BOJ maintained its program of expanding the monetary base at an annual rate of 60-70 trillion yen a year. The BOJ expects the annual rate of core CPI to rise while the bank also maintained its view that the economy will continue recovering moderately.

chart-increasing-yields-benefit-the-greenback.png

The gain in the yield differential put pressure on the EURUSD currency pair. Prices fell below support near the 10-day moving average at 1.3725 and will likely test support near 1.34. Momentum on the currency pair is negative as the MACD (moving average convergence divergence) index generated a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses below the 9-day moving average of the spread.

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