Fiscal policy and currencies: what's the story?
Budgets, deficits and tax changes move currencies through growth expectations and bond supply. Fiscal news lands less often than monetary news but hits with conviction.
What are you watching?
- the fiscal stories with currency implications
- how deficits feed the bond market and the currency
- the fiscal event that last moved your pairs
Background: bond yields and exchange rates for the transmission.
Background: Bond yields and exchange rates: why currency traders watch the 2-year yield
Currencies often follow the gap between two countries' government bond yields. How yield differentials work, why 2-year yields track central bank expectations, and when the link breaks down.
Why do currency traders watch bond yields?
Because money tends to flow toward higher returns. The gap between two countries' bond yields, especially 2-year yields that track central bank expectations, often moves in line with their exchange rate.
What is a yield differential?
The difference between the yields on comparable government bonds in two countries, such as US and German 2-year bonds. A gap widening in one country's favour tends to support its currency.
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