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What happens now when bonds signal a massive red flag to the markets?
he
had been heading in that direction for a while, but on August 15, the United States
yield curve finally reversed. Or rather, the main part of the inverted curve.
The gap between three-month and ten-year US Treasury bills is negative
Since May.
But
it is the gap between two years and 10 years that traders, economists and the center
the bankers are really paying attention.
Why?
Because historically, a reversal preceded a recession more often than
do not. The curve reversed before the burst of the dotcom bubble in 2001, then
2007, just before the 2008 financial crisis.
This is not a cast
signal but he's as strong as he gets that the US economy is heading towards a
slowdown.
What should FX traders do?
For
To begin, remember that a reverse rate curve is not a guarantee of
recession is not a warning that you are imminent. If a slowdown is coming,
it could still be a year or two. Currently, the US economy is in
respectable form.
Growth
has slowed down, but remains firm. Unemployment is at its lowest for several decades and wages
grow up well. Inflation is about what the Fed wants it to be.
obviously,
the global recession potential will hit the emerging market at high beta
most difficult currencies. Currencies like rand and rupee collapsed
recent sessions. The fastest growing economies will not succeed if the demand
crush.
the
The trio of raw materials will also suffer. Australia provides iron and copper to a hungry
Chinese manufacturing sector, but it will take a hit. The Australian and the kiwi
also suffered strong downward corrections in their respective share of central countries.
banks.
More
slack could be in progress if growth slows down; the question here is whether
the more stable majors will also be weakened by the national stimulus to minimize
the divergence.
the
The loonie has done quite well lately, helped by a strong economy, but it is
always sensitive to the evolution of the oil markets. A slowdown in growth will be
reduce the demand for crude.
the
Both the yen and the swissy have risen sharply in recent weeks. Their refuge
the call could push them even higher as investors move away from the riskier
parings.
While
the dollar is usually a popular game of refuge, it remains to be seen if the
Federal Reserve will play ball with market expectations, or step on foot
own way, more hawkish.
Yes
the Fed is about to make several more cuts over the next year the
dollar can find some of its sapped appeal.
Meanwhile,
the euro could be looking into the barrels of another bazooka from the ECB's policy should
the stuttering of the euro zone. Recent data has shown a contraction of the German economy.
Quantitative easing could be redeployed and rates could fall.
A recession could be
enough to cause waves for Sterling, which has been for a long time now
isolated markets broadly by the concentration, similar to a laser, traders on the result of
Brexit.
The timing is important
A
the recession is not guaranteed. And even if we arrive, we do not know when.
The main risk for traders is timing. Those who are heading to paradise
or bypassing too early the riskier currencies could be caught by more positive
the evolution of trade and monetary policy.
But
chasing high returns with the specter of a global slowdown at the horizon too
at his risk.
This article has been submitted by Markets.com.
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