SYNERGY FX FOREX MARKET ANALYSIS BY TODD DEITERICH | 22.07.15

BOND YIELDS ARE ON THE MOVE This past Monday was the first time in over a month that events in Greece didn't force the FX market hold its collective breathe over the weekend. As such, many real money FX traders are now focusing on more traditional metrics of currency price action. An example of a traditional market driver is the yield spread between the US 10yr notes and the German 10yr Bund. The cause and effect principle of the spread between these two debt instruments is simple: the EUR/USD usually falls when the spread widens and rises when the spread narrows. The idea is that the ECB's QE exercise has turned the EURO into a funding currency and capital will flow away from the single currency and into the USD as the yield advantage increases to the US 10yr note. Further, from a FX pricing point of view, the absolute yield value is less important than the spread value for determining the EUR/USD price. A perfect illustration of this was in mid-March of this year. At the time, the US 10yr note yield was 2.25% and the yield on the German Bund was .218% ... or a spread of 203 basis points. With the spread pushing a multi-year high, the EUR/USD was trading between 1.04 and 1.05. However, by mid-May Greek contagion fears and liquidity concerns had pushed the German Bund yield to 1% while the US 10s had dropped to 2.10% ... reflecting a spread of 110 basis point as the EUR/USD traded over the 1.14 handle. With the recent hawkish rhetoric from the FED pointing to the initial normalization of rates contrasting the ECB's expansion of the investment grade of assets for QE purchases, the current US/BUND spread stands at 157 basis points with the EUR/USD at 1.0900. If US Q3 economic data meets market forecasts and the ECB continues to expand its QE exercise going forward, it's reasonable to expect this spread to diverge further to the favour of the USD and see a lower EUR/USD rate. The EUR/USD traded briefly below the May support level of 1.0815 before bouncing back to 1.0950 during the NY session. With no first-tier data on the schedule until next week's FOMC meeting, we could see a few days of range trading. However, momentum traders may want to sell a break of the 4 hour support line at 1.0880 for a potential move below 1.0800. Synergy FX advises to only a trade above 1.1090 changes the downside momentum.

The USD/JPY ran out of steam just below 124.50 but still has a constructive chart pattern. With the yield play between the US 10s and 10yr JGBs widening, the upside potential back over the 125.00 level is fair bet. Medium-term traders can look to add to long USD/JPY positions at 123.60 for an initial target of 125.00 with a 122.40 stop. The AUD/USD has seen the bears take several stabs at breaking the .7300 level with no success ... yet. It looks like the buoyancy of the AUD/NZD has prevented an Aussie washout for now. With the RSI showing some divergence over 35 and the price back over .7400, short-term traders can look to sell at .7410 for a move back to .7310 with a .7455 stop. The technical picture in the GBP/USD remains opaque with the pair trading on both sides of the 30 day moving average during the last 8 trading sessions … best to stay on the side-lines until a clear signal is generated.

SYNERGY FX