Oil Price Re-Tests $60 As Yen-Strength Steps Back; EUR/USD Tests Range


Last week saw risk aversion show after the FOMC rate decision on Wednesday, and that theme remained fairly visible into the Friday close. The US yield curve inverted on Friday, with the three-month Treasury Bill yielding greater than that of the 10-year Treasury note; and this was the first time that’s happened since 2007. As many can remember, 2008 turned out to be a pretty painful year. But, that pain did not start directly after inversion, highlighting the inadequacy of using this observation as a timing variable. Historically, that’s somewhat of the case with yield curve inversion – it generally highlights pain ahead because of the distortion that’s seen in the observation itself – with short-term paper carrying a higher-yield than longer-dated instruments; but that does not mean that a sell-off or major turn is immediately ahead. It does highlight, however, that market participants should be on guard.

For the yield curve to invert, investors would hold a greater demand for longer-dated Treasuries, indicating a reticence to invest that same capital in riskier, potentially higher-yielding assets. This denotes rich valuations across stocks to go along with attractive yields in shorter-dated fixed-income instruments; coupled with fear that prices may pullback, making those riskier, potentially higher-yielding investments as less attractive.

On Friday, the currency market started to show swings of risk aversion with the Japanese Yen gaining in value. The low-inflation, negative rate backdrop in Japan has made the Yen a carry trade favorite for investors to sell against higher-yielding currencies. This has built-in a generally sanguine backdrop in Yen-pairs during times of ‘risk on’ market themes, similar to what was seen in January and February as markets were recovering from the Q4 slump. But, as risk aversion began to show last week around the FOMC rate decision, USDJPY began to break-lower, indicating Yen-strength, and that move continued as USDJPY pushed down to a fresh monthly low ahead of the close.

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