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Chapter 28, Part II. Relation with Other Financial Markets. Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 26, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    But the relation between YTM and Price is not linear – it looks approximately as on the chart:


    [​IMG]


    Pipruit: Well, that’s very interesting, really. But how does all this stuff relate to the Forex market?​


    Commander in Pips: Since we’ve turned to education of inter-market relations and already have met with Gold and Oil, don’t you think that Forex has relations with other markets also?

    Pipruit: Well, I can’t exclude that.​


    Commander in Pips: Thanks. I will tell you more. In fact, the bond market, i.e. percent rates market is a carcass of economy cycles frame work, since this is a major tool of central banks to control the balance between inflation and growth. Bonds are financial instruments that allow interest rates to be traded. You probably do not know this, but there are futures exist on Fed Fund Rate also, and on the 3-month rate, and 6-month, 1, 2-year, 10-year, 30-year and some others. This is a huge market. In fact bonds are the closest assets to economic cycles and the most sensitive to them. Let’s remember the Dollar Smile theory from the Dollar Index chapter. When does the US dollar usually rise by this theory?

    Pipruit: Well, first, when the economy falls in recession, risk aversion and flight to quality appears. Second is when the economy starts to exit from recession and turns to growth. On that stage the dollar mostly grows due improving of overall situation in the economy and hiking of interest rates.
    Commander in Pips: Very well. What if I say that bonds react much faster on the same process, especially during the growth stage, do you believe me that there is a correlation between the US Dollar and bonds?
     
    #1 Sive Morten, Dec 26, 2013
    Lasted edited by : Oct 8, 2016
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