The Correlation of US Bonds Yields to USDCHF
US bonds yields have shown a historical correlation to USDCHF
Since 1990, and especially after 2007, global financial markets operate as a unified investing area. An area that incorporates several different combinations of risk/return. If the combination of risk/return shifts significantly in one market then immediately all the other financial markets follow. The aim is always to achieve equilibrium between risk and return.
The Relation of US Bonds and USDCHF
The mechanisms behind the bond markets are very similar to the mechanisms of Forex markets. Bonds and Forex currencies are both linked to the current level of interest rate. Any change in the level of interest rates or in the broader interest rate expectations creates a new risk/return equilibrium.
The rates of US Bonds show historical correlation to USDCHF. The Swiss Franc along with the Japanese Yen offer traditionally very low-interest rates. Hence, if US rates start moving higher investors tend to go long on USDCHF in order to implement carry-trading strategies. In other words, they go long on USD against the CHF in order to collect the positive USDCHF overnight rate.
Chart: 10-Year Note Rates and the USDCHF (ForexExperts.net via Google Finance)
The Inverse Relation between Bond Rates and Bond Prices
Although USDCHF shows a direct correlation to US bond yields it shows an inverse correlation to US bond prices.
Let's see why.
-Bond price is the price at which a bondholder pays to buy a bond. If the level of interest rates increases the price of bonds decreases.
-Bond yield refers to the rate of return paid to the bondholder. If the level of interest rates increases the yields of bonds increases too.
Therefore, bond prices and bond yields are inversely correlated. When bond prices fall the bond yields rise, and vice versa.
■ USDCHF directly correlated to US Bond Yields
■ USDCHF inversely correlated to US Bond Prices
US Bonds and USDJPY
As in the case of USDCHF, USDJPY is also strongly linked to US Treasury Bond yields. The Japanese Yen offers traditionally very low rates and it is considered a good tool for trading shifts in market interest rates.
During periods when US rates start moving higher, Forex investors tend to go long on USDJPY in order to implement carry-trading strategies.
■ USDCJPY directly correlated to US Bond Yields
■ USDJPY inversely correlated to US Bond Prices
■ The Correlation of US Bonds Rates to USDCHF