Talking Points:
- Plummet in long-end yields signals warning bells over global economy.
- 20-day correlation between Gold and JPY/USD is +0.87.
- FX volatility is set to remain high - it's the right time to review risk management principles to protect your capital.
A look at global markets today reveals nothing pleasant: long-end yields are falling across the globe; growth commodities are falling; safe haven commodities are rallying; equities have turned lower; and low yielding currencies are gathering momentum in the FX space.
To be clear, this is a 'risk off' environment through-and-through; when the US Dollar (via USDOLLAR Index) maintains an inverse relationship with the 10-year US Treasury note yield (chart 1 below), it typically means that investors are shuffling into both bonds and the buck at the same time - shelter being sought (those storm clouds that were gathering on June 10 did indeed bring the rain).
Chart 1: USDOLLAR Index versus UST10YY (2014-2016)
Concurrently, as markets solidify themselves in the risk-off position, it's important to recognize the strengthening relationship between Gold and the Japanese Yen. In effect, with the long-term cost of carrying Gold at around -2.4%, the lower long-end JGB yields go (20-year went negative today for the first time), the less of a differentiation there is between Gold and the fiat, in this case, the Yen. To no surprise, then, as global yields fall further and markets seek shelter, Gold and the Yen have moved in lock-step (chart 2 below).
Chart 2: Japanese Yen (via inverse USD/JPY) versus Gold (2014-2016)
Why does this all matter? For risk, it's bad news. For the US Dollar, it's equally bad: the greenback's sustained elevation in the wake of Brexit has been purely due to its safe haven appeal (exogenous) rather than improved prospects for US growth or the Fed normalizing (endogenous). Which is to say that, without improved US economic data, the US Dollar is a house of cards.
See the video (above) for technical considerations in EUR/USD, GBP/USD, USD/JPY, Gold (CFD: XAU/USD), Crude Oil (CFD: USOIL), GER30, the USDOLLAR Index, as well as a discussion on the upcoming slate of US economic data ahead of Friday's June US Nonfarm Payrolls report.
Read more: GBP/USD in at Fresh Post-Brexit Lows; USD Needs Data to Improve
--- Written by Christopher Vecchio, Currency Strategist and Summer Xing, DailyFX Research
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
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