I’m told the COT and the seasonals are good for bonds though I must confess I have struggled to find predictive value with either of those two inputs. What I have found is a rather consistent relationship between utility stocks and US long bonds. They move together and divergences are usually resolved in favor of the direction of utilities. Utilities have been much stronger than bonds lately so if bonds take their lead and rally, what should a currency trader do? Let’s isolate rates as a variable in trading the Euro of the last six years:
I have been rather bullish on bonds for this reason. Yields are one variable in my Euro fuel gauge (and our Yen fuel gauge) but we want to see how it works if taken all by itself:
If we knew that bonds were going up tomorrow and therefore bought the Euro the night before we would have gained .4 Euro points in the 10/’13- 10/’17 and you can there were two substantial drawdowns. The Utility index did much less well as a coincident indicator.
Let’s look at this from both the long and the short side. The next chart shows you the profits from both. The only period of poor profitability was the last 2 weeks. This is certainly connected to the tariff tough-talk. If that talk subsides or proves toothless then we should be set up for a substantial Euro rally (ceteris paribus).
The cumulative profits are approximately .95 points while the Euro only traversed .3 points net. The periods when rates don’t matter in this logical way are when there is severe Euro area stress such as prospective Greek bankruptcy.
One last quick note: if we knew how bonds were going to behave then the thing to do is trade the Yen in sympathy:
Yes, you could just trade bonds but if you are designated F/X trader and you have a strong view on US rates then you have a solution – ignore every currency, just trade then Yen.