USDOLLAR diverges from real yield, a dollar floor may be near in the short-term



In a previous article we suggested that the US 10-year real rate was topping out and had charted a head and shoulders top. This pattern is still evident but is yet to breakdown. Rather the real yield has found support near the 2.09% (green horizontal arrow). In fact, the real yield has bounced slightly since hitting support and is now trading near 2.20%.

FXCM's USDOLLAR has continued to chart a series of lower peaks followed by lower troughs on its daily timeframe. This puts the daily chart into a defined downtrend. However, this denotes a divergence in behaviour when compared with the real yield.

The blue arrow shows the bounce off the real yield's support at 2.09%, but since 22 November (blue dashed vertical) the USDOLLAR diverged and continued downwards (red arrow). This has resulted in the correlation coefficient (cc) between the two dipping slightly (orange arrow).

Notably, the cc remains a robust and positive 75%. Therefore, if the real yield continues to consolidate around its support level, there may be a floor under FXCM's USDOLLAR. I.e. limited scope for decline until the two series converge again. As such, we continue to closely monitor the USDOLLAR, and its relationship with the real yield.

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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