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Thoughts from the Trading Trenches

23 Years ago | January 01, 2015 9/29/23, 12:00 AM

In this issue:

   GBPUSD to 2-yr Gilt Correlation Trades

   Video; Forex Trading Outlook for January, 2015

   Special Webinar Announcement

GBPUSD to 2-yr Gilt Correlation Trades

The government bond 2-yr interest rate is a great measure of market sentiment about the prospects for near term economic growth to watch in most economies. This is because it is driven by existing central bank policy and by expectations about what policies the central bank will be pursuing in the near term. Unlike the longer-term rates, things such as long-term inflation or growth expectations do not figure prominently into the level of the 2yr bond.

Since forex is primarily a short-term market, it all about short-term money flows. Of course, interest rates are the "cost" of money, so it should not be surprising that forex values tend to be tightly correlated. You can see these relationships in many of the items displayed in the table below. Look especially at the strong relationship of major USD pairs to U.S. 2-yr yields. This is why Fed policy meetings are so closely followed by knowledgeable forex traders.

For trading, I find these relationships to be useful in deciding the side of the market to trade from, however, they do not provide trading levels. They can often signal well in advance when broad market trends are likely to be shifting.

2014 saw a prime example of how these relationships can work. In the first half of the year, it had become conventional wisdom that the U.K. would be the first major economy to move into a cyclical policy tightening cycle. This was reflected in rising 2-yr gilt rates and a higher GBPUSD. However, later in the year U.K. economic data unexpectedly started to slow as economic growth the Eurozone has started to fizzle out. You can see the chart that the U.K. 2-yr gilt yield has fell as expectations for a rate diminished. GBPUSD has fallen as interest rates have eased. In our 50-day correlation table that the GBP to 2-yr gilt correlation is a strong +0.82.

John M. Bland



Video: Forex Trading Outlook for January, 2015

(note EURUSD set a new low at 1.2097 after this video was made)


Special Webinar Announcement

Stay tuned to your email for a anniuncment of the date for a special webinar that I will be hosting in early January. In it I will show a proprietary trading technique that I use and you can use immediately.

Stay tuned.

Jay Meisler, founder

Global Traders Association

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