It seems that investors expect global easing of monetary policy, both in Europe and the United States, which can be demonstrated by the systematic increase in bond prices while their yields on both sides of the Atlantic have been falling.
The lack of progress in talks on the trade war between the United States and China, increasing concerns about slowing global economic growth and falling inflation expectations may cause investors to buy safe bonds, which in turn means lower yields. Theoretically, bonds with current profitability are bought today, because there are fears that tomorrow the yields will be lower and, in turn, the price will be higher. The drop in yield, on the one hand, may be the result of increased concerns about economic growth and inflation, and on the other, a u-turn in central bank policy. In principle, it can be a 180 degree turn, from hawkish tones to very dovish tones, and relatively quickly, as for monetary policy.
Long-term inflation expectations in the United States dropped to the level of 1.84 percent, which is the lowest level since July 2017. On the other hand, the market inflation expectations in the euro area were at the lowest level since September 2016 at 1.30 percent. It is also an argument for the lack of hawkish rhetoric in the language of central banks. As a consequence, we can observe a drop in yields of 10-year US bonds to 2.29 percent, which is the lowest since October 2017. In turn, the yield on 10-year German bonds is at the level of minus 0.15 percent, the lowest since September 2016.
The interest rate market and the bond market can often affect the foreign exchange market, but at a time when there is a divergence between different countries. Currently, it seems that we are dealing with a global phenomenon. Hence, the impact on the currency market is insignificant. Perhaps, if on one side of the Atlantic expectations would change, and on the other not, then the impact into the currency market could be greater. Otherwise, stagnation may continue and volatility may remain low.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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