The Main FX Charts For The Upcoming Week: The 2s10s Is Set To Resume Flattening Again
Goldman's John Noyce once again lays out all the main charts to keep a track off in the coming week, with a particular focus on the EURUSD, EURUSD 2 Year swap spreads, USD 2 and 10 Year swap spreads, but most notably the 2s10s treasury curve, which according to Noyce is set to resume flattening.
First, looking at the 10 year USD swaps...
The downtrend from the June '08 highs and the 61.8% retrace of the drop from the June '09 highs to the October '10 lows are converged on 3.6%
A break above this region would be significant, but the weekly moving average setup is nothing like as aggressive as that on the 2-year (here the 200-wma only stands a further ~35bps above current levels).
It therefore seems to fit that the 10-year/2-year curve is at the “highs”…
This would be a pretty natural place for the curve to begin flattening again.
The spread between 10-year and 2-year USD swaps currently stands at 268bps, very close to the prior cycle highs from 15th December/18th February ’10 at 273-274bps.
In terms of structure the setup isn’t that clear, but given the curve began to flatten from just above current levels on two occasions over the past year it seems very reasonable to watch for signs of another similar move beginning.
Putting all the pieces together; the aggressive weekly moving average setup and triangle like consolidation on 2-year swaps, the relatively less aggressive weekly moving average setup on 10-year swaps and the current extreme level of the 10-year/2-year curve, it seems the market is at a juncture where a break higher in short-end yields would be very significant both in specific yield related terms and also due to the USD’s +ve correlation to short-end U.S. yields in a number of currency pairs.
Full weekly presentation:
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