by Jay Norris

What is bearish here for the European majors is that U.S. Bonds are up over a full point today or $1,000 face value and EUR is little changed, while GBP is lower on the day by over 50 pips. That is a divergence that cannot be overlooked, and could be telling us that the Dollar is leading Bonds. Below is a daily chart of EUR and the 30-year Bond future.

Charts courtesy of eSignal

In Sept of this year the greenback failed to rally on price breaks in Bonds, while the Euro skied. The significance of this is that when Bonds break, interest rates go up. If the Dollar could not rally on market-induced rate up-ticks on the long-end, what news would it rally on? Indeed we saw a nasty Dollar sell-off from September right up until Thanksgiving. Currently the relationship between higher rates on the long end and up-ticks in the Dollar has resumed, meaning that the previous relationship has flipped, with the European currencies actually weakening today on the up-tick in Bonds which equates to a downtick for long-term U.S. rates. Holiday markets or not, we have action here that warrants monitoring.

Of course this current action has come on lower volume, but does beg the question: What happens to the European currencies if U.S. Treasuries’ rates indeed up-tick? My experience tells me that they will go lower as a more normalized relationship between U.S. Bonds and the U.S. Dollar resumes. We’ll likely have to wait until ’08 gets rolling for confirmation, but we could see a symmetrical relationship between U.S. Bonds and the European-based currencies, much as we had a symmetrical relationship between U.S. stock indices and the carry trade.

Feel free to call or e-mail me if you have any questions.

Jay Norris


DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and may not be suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. In no event should the content of this correspondence be construed as an express or implied promise or guarantee from B.I.G. Forex, LLC and Brewer Investment Group, LLC or its subsidiaries and/or affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of positions such as spread or straddle trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed.