A potential real rate correction mixed with Q3 earnings is likely to make for a fascinating end to a challenging year


Source: www.tradingview.com

Since April, FXCM's USDOLLAR basket has strongly correlated with the 10-year real rate. The current reading between the two is a strong 92%. Thus, it is no surprise that the USDOLLAR reacted positively and closely as the real rate appreciated.

Last week's real rate price action is insightful and shows a Doji candlestick (red arrows). The real yield attempted to move higher and lower but closed flat for the week. This activity implies uncertainty and indecision. Moreover, this comes when the real rate is overbought (green rectangle).

This excess will need to clear at some stage, and the indecision last week may suggest this may be sooner rather than later.

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Given the correlation with the USDOLLAR, a normalisation here will likely ripple through to the greenback. I.e. a pullback in the dollar due to a technical correction in the real rate.

If this happens, sentiment will likely switch from risk-off to risk-on. This scenario comes as the Q3 earnings season kicks off. The combination sets an exciting Q4 and an interesting end to a challenging 2022.

Russell Shor

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.

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