Government bonds as a leading indicator of the foreign exchange market. Anton Hanzenko

As you know, all investment instruments are related to one another. So, with the rise in prices for raw materials – commodity currencies will strengthen, and with growing fears – the demand for safe assets will grow. But, there are more specific indicators for each currency and currency pair – government bonds of a country.

Government bonds or state bonds refer to debt securities and serve to cover the budget deficit, raise funds, etc. State bonds depending on the terms of execution are annual, biennial and so on up to 20 and 50 year olds depending on the countries. The yield of government bonds, as well as currencies in the market may change over time. The yield of government bonds can be influenced by many factors – from interest rates to statements of the heads of the Central Bank and international scandals.

So how can you predict the dynamics of a particular pair with the help of state bonds? Everything is simple – there is a direct relationship between the profitability of state bonds and the value of the country’s currency. With the growth of yield of state bonds, the value of the national currency also increases.

For evaluation, it is customary to take 10-year-old state bonds, because they optimally reflect the state of the market. All necessary schedules can be taken at ru.investing.com. For example, let’s compare the yield of 10-year-old state employees. US bonds and the dollar index against the main basket of world currencies.

For evaluation, it is customary to take 10-year government bonds, since they optimally reflect the state of the market. All necessary charts can be taken at ru.investing.com. For example, let’s compare the yield of 10-year US government bonds and the dollar index against the main basket of world currencies.

So, the figure shows an example of 10-year-old US bonds (blue line) and the dollar index (red line). As you can see, the dependence is direct and very significant. And given the fact that the dynamics of state bonds is a leading indicator, you can make superficial forecasts based on the dynamics of bonds.

To analyze a particular currency pair you need a site ru.tradingview.com, where we need to determine the spread, the difference between government bonds of the necessary currencies. For example of the EUR/USD currency pair, it is necessary to determine the difference between the 10-year government bonds of Germany and the USA. And for GBP/USD – 10-year government bonds of the United Kingdom and the United States.

For convenience of search of bonds of this or that country on a site ru.tradingview.com it is possible to use a search word “BONDS” which will give access to all accessible state bonds.

To build a spread chart between 10-year-old state bonds of Germany and the USA in the line of the instrument’s name write the following expression “DE10Y-US10Y”. This expression has the following meaning: state bonds of Germany – state bonds of the USA. Now, by clicking on the “Compare” button, add the EUR/USD pair. For the convenience of reading the charts, they are converted into lines of different colors.

Blue line – the spread of the yield of 10-year state bonds of Germany and the United States, and the red – the pair EUR/USD.

A similar method can be used to make such an indicator for most currency pairs. For example, AUD/USD: in the line of the instrument name write the following expression “AU10Y-US10Y” and add the AUD/USD pair.

Such an analysis of currency pairs is very efficient, but cannot be used independently, because it gives only an approximate direction of the currency pair’s movement. But, this approach can be an excellent addition for any strategy.

Hanzenko Anton

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