The US 10-year real yield is charting a potential reversal pattern in its daily time frame – a head and shoulders top. The pattern has a downwards bias to it, as evident by the downwards sloping neckline (red trendline). The head and shoulders pattern will complete if the real yield breaks down below the neckline. The right shoulder was heavily influenced by the lower than anticipated CPI print on Tuesday, which saw the real yield drop by 6.9% on the day (top green arrow).
We note that the correlation coefficient between the real yield and FXCM's USDOLLAR basket is a relevant 85%. This means that there is a noticeable and positive relationship between the two. Therefore, there is little surprise that the USDOLLAR is also showing signs of decline. In truth, its downtrend accelerated following Tuesday's CPI release (bottom green arrow), with the USDOLLAR basket dropping by 0.86% on the day. The acceleration downwards is evident by the shallower green trendline shifting to the steeper orange trendline that is defining the USDOLLAR's candlestick momentum.
The dollar tends to be a safe haven and as the real yield declines, the riskier side of the market becomes more persuasive. I.e., there is less flow to the dollar safe haven and even a reallocation out of it.
If the head and shoulders completes, with the real yield declining below its red neckline, there is likely to be greater headwind facing the dollar with more interest gravitating towards the riskier side of financial markets.
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.