Forex markets can be affected by fluctuations in markets of various other securities and commodities. Therefore, currency traders are always keen to keep an eye on the big picture and pay attention to possible market correlations which can provide profitable opportunities. Also, monitoring other markets can help to foresee potential risks of loss. One of the most closely watched markets by forex traders is the U.S. Treasury market.
Yield Curve
When the market experiences significant increases in uncertainty and fear this many times will cause investors to take their invested funds out of more risky and speculative assets and put them into less risky and safer securities, such as bonds. Investors tend to view bonds with longer maturity times as less safe compared to shorter maturity bonds.
Therefore, this is reflected in the yield curve during times of uncertainty when the 6-month Treasury bill is preferred over the 30-year Treasury. Much can occur within 30 years as compared to 6 months which can affect the price of treasuries. Hence, from this perspective shorter maturity Treasuries become more attractive to market participants. This usually causes the yield curve to reflect falling yields in Treasuries caused by increasing prices. The yield curve may also take on an inverted-shaped curve in times of high risk sentiment.
What This Means for Forex Markets
This is relevant to currency traders since U.S. Treasuries are purchased using U.S. Dollars. This causes an increase in the demand for the U.S. Dollar which results in appreciating valuations in the forex markets. This phenomenon became clearly present during the 2008 Financial Collapse. Therefore, investors looking to profit off increasing risk sentiment may want to consider taking a bullish view on the U.S. Dollar.
On the other hand, many times currency markets can be more complicated and challenging to predict with complete accuracy. If the risk sentiment in the markets is being caused by weakness in the U.S. economy, this may have a dampening effect on U.S. Dollar appreciation. Other currencies such as the Japanese Yen may be a better buy into rising risk sentiment markets in certain instances. Therefore, it is important for investors to take into consideration all of the various factors affecting in each situation in the market.
Writer Bio
Le Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.
Sources:
http://www.dailyfx.com/forex/education/trading_tips/daily_trading_lesson/2012/04/16/The_Importance_of_Treasuries_to_FX_Traders.html
http://fxtrade.oanda.com/learn/intro-to-currency-trading/fundamental-analysis/monetary-policy
