Article Summary: The DJ FXCM Dollar Index (ticker: USDOLLAR) trades at its strongest-ever correlation to US Government Bond Yields. What does this mean for Dollar forecasts and trades?
Correlation between US Dollar Index (ticker: USDOLLAR) and US 10-Year Treasury Yield Near Record
Data source: Bloomberg, Chart Source: R
The strong correlation almost certainly is linked to the US Federal Reserve, and as such the Fed’s next moves are critical to outlook for the recently-downtrodden US currency. A chart below underlines the significance of the post-FOMC and post-Bernanke price level extremes on the Dow Jones FXCM Dollar Index.
Dollar Surges Post-FOMC Meeting then Tumbles Post-Bernanke—currently at key level
Source: FXCM Trading Station Desktop, Prepared by David Rodriguez
Where does this leave us? As an old saying goes, “Don’t fight the Fed.” Bernanke and Co. are not scheduled to meet this week, and a view of top 5 pieces of forex economic event risk shows that there’s no significant US data on the schedule.
Yet it will be critical to watch next week’s potentially pivotal US Nonfarm Payrolls report as Bernanke made it quite clear that the Federal Reserve’s next moves will depend on labor market trends. (See it on the DailyFX Economic Calendar)
In the meantime we believe that especially low forex market volatility hurts outlook for the safe-haven US currency, and indeed our short-term preference remains to sell into US Dollar weakness absent a turnaround in market sentiment.
Forex Correlations Summary
View forex correlations to the S&P 500, S&P Volatility Index (VIX), Crude Oil Futures prices, US 2-Year Treasury Yields, and Spot Gold prices.
Data source: Bloomberg. Chart source: R
--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com
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