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Yield Differential Lags Currency Pair

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Yield Differential Lags Currency Pair

The Euro broke out above resistance levels and continued to move higher on Thursday recapturing the 1.38 level. The strength in the Euro has brought unwanted attention from finance ministers who are starting to complain about the high levels of the currency and its effect on exports. Purchasing manager’s data was shrugged off, despite lower interest rate levels following the PMI release.

Yield differentials continued to consolidate holding below the zero level, despite a breakout in the currency pair. Generally the 2-year yield differential which drives the forward rate of the currency pair is highly correlated to the movements of the currency. With the US government shutdown now in the rear view mirror, investors are focusing on soft US data which is keeping US yields very low.

Purchasing manager’s data in the Euro zone for September came in weaker than expected. The euro zone PMI composite reading came in at 51.5 compared to expectation of a print at 52.4, with the manufacturing component at 51.4 compared to expectations of 51.3 and the services at 50.9 compared to expectations at 52.2. Germany’s manufacturing PMI came in as expected at 51.5, but the services component disappointed at 52.3 compared to expectations at 53.7.

The EURUSD currency pair broke through weekly resistance near the January 2013 highs at 1.37. The next level of target resistance is the September 2011 highs at 1.4250. Support is seen near the 10-day moving average at 1.3650.

Momentum on the currency pair is strong with the MACD (moving average convergence divergence) index generating a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index moved from negative to positive territory confirming the buy signal. The one caveat to the recent move is the print of the RSI at 73, which is above the overbought trigger level of 70 and could foreshadow a correction in price action.

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