Short-term real interest rate reaction
After yesterday's CPI release showed some moderation, real rates declined (down blue arrow). However, this drop was temporary, and the market faded the move. I.e. activity supported the dip with real rates moving back to pre-announcement levels.
Longer-term real rate analysis and its correlation to NAS100
The weekly real rate has pulled back since the week of July 11 (blue dashed vertical). Current price action makes for interesting analysis. A reference candle may have charted (red circle) - a candle with a higher low to either side. If the price closes above the reference candle's high, a potential trough is in play. This pattern implies a platform for higher real rates.
The moderation in inflation suggests that higher real rates face headwinds, leading to the initial sell-off as indicated above. However, as the market faded the sell-down, the potential trough scenario remains a possibility. In this regard, we note:
- Real rates have an inverse correlation to the rate-sensitive NAS100.
- The correlation coefficient is a strong -0.85 (bottom indicator).
The NAS100 rose after the CPI release. However, an anomaly occurred by the NAS100 not following the fading of the real rate given the correlation coefficient. The NAS100 closed 2.5% up on the day. This irregularity makes for complex analysis. Either the NAS100 will decline due to the real rate's price action or vice versa. This assessment is because the NAS100's inherent time value of money characteristics will not allow it to shake the influences of real rates for long.
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.