Bonds, Gold and Oil

Bond yields

A two-year government bond yield reflects what the market expects the policy rate to average over the next two years. The spread between US and German two-year yields tracks EUR/USD closely over months, and a move in the spread often precedes a move in the pair. Ten-year yields reflect growth and inflation expectations further out. Traders watch both, and a currency whose yields are rising relative to its peers has a tailwind.

Gold

Gold pays no interest, so when real yields rise it becomes less attractive and tends to fall; when real yields fall, or in a crisis, it tends to rise. Because it is priced in dollars, a stronger dollar makes it dearer for everyone else and usually pushes it down. Gold is also traded as a CFD at most brokers, with its own pip and contract conventions, and it moves the Australian dollar at the margin because Australia is a major producer.

Oil

Using cross-market signals

If USD/CAD is rising while oil is rising, one of them is likely to be wrong and the divergence is worth investigating. If EUR/USD is falling while the yield spread is moving in the euro's favour, the same. These relationships are tendencies, and they break, but a forex trader who watches yields, gold and oil sees a move coming more often than one who watches only the pair.

Key takeaways

• Two-year yield spreads lead currency pairs; ten-year yields reflect growth and inflation.
• Gold moves inversely to real yields and the dollar.
• CAD and NOK follow oil up; JPY and INR follow it down.
• Divergences between a pair and its related market are worth investigating.