USDOLLAR diverges from fixed income market


USDOLLAR Weekly Chart

Last week's USDOLLAR price action was interesting. It closed below the low of the previous week's low (black dashed horizontal), effectively confirming a lower peak. This sees FXCM's USDOLLAR basket charting a higher trough (HT), followed by a lower peak (LP), which is a symmetrical triangle (converging green lines). I.e., The USDOLLAR basket is consolidating sideways. The weekly RSI has been oscillating around 50 (black ellipse), also suggesting neutrality.

USDOLLAR Diverges From US 2-Year Note


There is generally a positive relationship between FXCM's USDOLLAR basket and the US fixed income market. Therefore, it is surprising that the USDOLLAR charted a lower peak whilst the US 2-year note's momentum increased (as represented by the shift up in trendline on the top chart).

The US 02-year yield is a good proxy for Federal Reserve monetary policy because the short-end of the curve adjusts quickly to changes in the cost of capital. There may be a few factors influencing the current intermarket relationship:

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  • The Fed is likely to pause on 14 June.
  • Other central banks surprise hikes, e.g. the Reserve Bank of Australia and Bank of Canada, may have influenced the relationship.

Nevertheless, the US02-year is repricing to the hawkish side and the Federal Reserve is likely to continue hiking from July. This makes the break in the correlation somewhat puzzling as the USDOLLAR lags.

USDOLLAR Daily Chart

FXCM's USDOLLAR basket is showing signs of weakness on the daily chart. It is positioned between the lower blue and red bands. This is considered the weak channel. Moreover, its RSI has dipped below 50 (green rectangle), which is the bearish side of the oscillator. The longer the RSI maintains on this side, the greater the likelihood of further weakness ahead.

The Possibility of Reattachment

If the US 02-year yield continues to reprice to the hawkish side, the USDOLLAR may "reattach" and tend towards positive correlation once again. If the daily chart starts showing signs of bullishness, this reattachment process may have begun. We will be keeping an eye on the RSI and its relative position to 50, as well as the USDOLLAR candlesticks and their channel position.

Image by from Pixabay

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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