What's the funding market telling you?
Funding markets — repo rates, FX swap pricing, cross-currency bases — signal stress before most other markets notice. The signals are technical but the warnings are early.
Do you watch them?
- the funding signals you follow
- the stress episode they caught early
- how they reach spot currencies
Background: bond yields and exchange rates for the adjacent mechanics.
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.
Comments
Log in to join the discussion. Comments follow the community guidelines.
Log in to commentLoading comments…