This week, we saw a startlingly weak USD. What happened? One reason is that Janet Yellen in her testimonial as Fed Governor said nothing on the topic of monetary policy but that they will continue to taper. The second reason, US Treasury Bond yield slumps makes it difficult for USD bulls to awaken. This is an example of how bonds influence forex market.

This week, we saw a startlingly weak USD. What happened? One reason is that Janet Yellen in her testimonial as Fed Governor said nothing on the topic of monetary policy but that they will continue to taper. The second reason, US Treasury Bond yields slump makes it difficult for USD bulls to awaken.
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Links Between Fed Rate Hike, Bond Yields, And USD

Intermarket analysis that involves close observation on forex, stocks, commodities, and bonds, rarely takes the attention of forex traders, because most people commonly takes up only one or two markets. However, it is undeniable that price movements in forex market is related to the other three instruments. Increasing investors interest on Gold has been known to depreciate USD. Contrarily, Crude Oil prices tend to go up if USD weaken against other currencies. The ups and downs of exchange rate could also directly influence the ups and downs of stock values in export/import based companies.

Government-issued bonds such as the 10 Year US Treasury Notes indicate the rise and fall of investment risk and returns in financial market. Government bonds depend on the government's ability to buy back the notes and its interest on time. Bond yields is usually set on a certain rate not far-off above benchmark interest rates, and then it is traded in secondary market where the yield shall experience market dynamics. The possibility of Fed rate hike could drive bond yields higher. But in the current circumstances (The Fed refuses to declare anything about such hike on the grounds of unsatisfactory economic recovery), bond yields gravitate downward. Add to that inconsistent manufacture and industrial data, then we found a falling demand on US Treasury and its yields.


USChart of 10 Years US Treasury Bond Yields

The better economic prospects of a country, then the more people will seek its bonds, and rise the demands on its currency that will be used to buy the much-requested bonds. If US economy is on the up and up, then bond yields and the bidding volume will increase too. In this scenario, rising bond yields promote currency appreciation. On the opposite, slumps on US Treasury bond yields as it is now, although do not automatically depreciate the USD, but signal that people are less inclined to buy the country's financial assets.

USD Bears vs Euro Bears

Through fundamental perspectives, US Treasury bond yields and US Dollar exchange rates move to the same direction. Marketwatch yesterday reported that USDJPY tumbled as 10 Year US Treasury Bond yields fell to 2.5%, the lowest since October 2013. What will happen if US Treasury Bonds yield stay in low level like this?

Westpac today mentioned that Dollar index seemed stronger, but that is only because of rising anticipation for the upcoming ECB loosening monetary policy in June. Kathy Lien from BK Asset Manegement also steadfastly wrote in her newsletters about USD, No recovery until yields stabilize.

Nevertheless, the Greenbacks is still showing its strength against some currencies; Euro is much weaker due to the aforementioned ECB plan to loosen policy in their next meeting. Until ECB meeting in June 5, Westpac analyst would keep in mind a bearish Euro, as Europe PMI and German IFO is expected to slow. On the other hand, analyst from Danske Bank thinks that PMI and IFO might rise slightly, though they also put their bet on Euro bears.

Taking a glance at fundamental calendar, it seems there won't be drastic changes; this week's market dynamics is most likely continue to go on till the week ahead. If US Treasury Bond yields change course and stabilizes, then it surely will support the USD in forex market. But as long as US fundamental economics stay inconsistent, then there is few hope the yield will fully recover.