Last week, it was clearly visible that the currency market is highly correlated with the debt market and this is not surprising. You can say anything about the individual published macroeconomic indicators, but in general, the American economy is accelerating, and the European is slipping into recession. It is clear that this scares investors, and they are trying to withdraw money from Europe and transfer it to the United States. In many ways, this is now the main driving force in the currency exchange market. Well, then it's still more interesting, since the outflow of capital from Europe leads to a decrease in demand for debt securities of European countries. On the other side of the Atlantic, it is difficult to place newly arrived capital, and traditionally, a considerable part of the funds goes to purchase government debt securities. Therefore, if the demand for them is seriously growing, then the yield on them should go down. And this will begin to deter investors over time. In turn, the outflow of capital from Europe leads to a decrease in demand for European debt securities, which means that their profitability will begin to grow sooner or later. And apparently, this is exactly what we are observing now.
But first, you should pay attention to the final data on German GDP for the fourth quarter, which the market simply ignored once again. Although they showed that economic growth in Europe's largest economy slowed down from 0.6% to 0.4%. That is, before the recession is at hand. Well, if a recession begins in Germany, then in the rest of Europe too. Thus, the trend to weaken the single European currency will not go anywhere. It can only temporarily give way to false reinforcement. By the way, the market also ignored data on producer prices in Spain, the decline of which slowed down from -1.8% to -0.8%. But who cares about Spain when Germany is on the verge of a recession?
GDP growth rate (Germany):
So, returning to the debt market, we draw attention to the fact that the dollar began to actively lose its position in anticipation of the placement of 10-year-old British bonds. The placement resulted in an increase in the yield of 10-year bonds from 0.500% to 0.512%. So the growth of the pound was largely due precisely to the expectation of growth in profitability and increased demand. However, this also led to a local weakening of the dollar, as a result of which the single European currency was able to increase.
In addition, the dollar made an attempt to strengthen against the background of S & P / CaseShiller data on housing prices, the growth rate of which accelerated from 2.5% to 2.9% which turned out to be slightly better than the forecasts of 2.7%. Moreover, this is an inflationary factor, and the dynamics of housing prices will inevitably contribute to inflation, which can still grow. Nevertheless, the joy of the dollar was short-lived, as it soon began to lose its position again. It stopped shortly before the placement of already American debt securities. So, the yield on 52-week bills declined from 1.49% to 1.27%. Things are even worse with 2-year bonds, whose yield fell from 1.440% to 1.188%. Such a noticeable decline in profitability indicates a significant increase in demand. But the most important thing is that a similar situation no longer suits a number of investors who are beginning to transfer funds to Europe.
Yield on 2-year bonds (United States):
No macroeconomic data is published prior to the start of the American session, but there will be a placement of debt securities in Germany and Italy. If the yield on them goes up, then this will only confirm the fact of a reversal in the movement of capital. However, you should not think that this is a steady trend. The economic situation in Europe is noticeably worse than in America. So this is only a temporary phenomenon.
But with the beginning of the American trading session, the dollar may begin to strengthen again, as data on sales of new homes should increase by 1.9%. That is, there is a combination of rising home prices and increased home sales in the United States. Naturally, this alignment will attract investors. So in the medium term, nothing threatens the dollar at all. However, given the current short-term situation with the yield on government debt securities, we will see a weakening dollar again a little later. The fact is that 5-year government bonds will be placed in the evening, the yield on which is likely to go down noticeably.
New Home Sales (United States):
The single European currency has a good chance to rise to the level of 1.0900 today. Perhaps, it will rise higher for a while, but it certainly will not be able to gain a foothold there.
The pound will almost certainly make another attempt to rise above the level of 1.3000. Most likely, it will even reach 1.3025. But, as in the situation with the single European currency, it will definitely fail to gain a foothold at these levels.
