Yield differentials, LIBOR developments and the failure in the CRB and Crude Oil continue to boost USD
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The impact of interest rate differentials on FX is highlighted by the fact that the correlation between EURUSD and GE-US 10-year yields is now at +0.90, the highest since June 2007. Global bond yields may be rising across the board but the 10-year yield differential between Germany and the US continues to deteriorate for Germany, hitting 3-year lows at 0.73%. These increasingly meaningful differentials will continue to influence FX markets especially after JC Trichet indicated the ECB will extend its emergency collateral rules beyond 2010, while the Fed will conclude its MBS purchases next week. The yield differential story continues to favour the US dollar from both a short and long-term perspective. Aside from the 10-year yield differentials, EUR 3-month LIBOR hits fresh record low at 0.58% while USD 3-month LIBOR advances to its highest since September 2009.
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