Don't Ignore This Chart

Watch these Yield Spreads for Clues on the Greenback

Arthur Hill | 

The US Dollar ETF (UUP) is made of five currency pairings. The Dollar/Euro ($USDEUR) pair accounts for 57.6%, Dollar/Yen ($USDJPY) weighs 13.6%, Dollar/Pound ($USDGBP) is 11.9%, Dollar/Canadian ($USDCD) is 9.1% and Dollar/Swiss ($USDCHF) is 3.6%. Clearly, the Dollar/Euro relationship is the big driver here and Dollar/Yen is a distant second. Chartists interested in the twists and turns of the greenback should also keep an eye on the yield spreads. The chart below shows UUP with the 10-year yield spreads for the US and Germany, and the US and Japan. Notice that there is a strong positive correlation between UUP (top window) and the spread between the 10-yr T-Yield ($UST10Y) and the German 10-yr Yield (middle window).

UUP and the US-German yield spread peaked in December and moved lower throughout 2017. UUP continued to a new low in early September, but the yield spread did not exceed its July low. Thus, a higher low could be forming in this key spread and a break above the August highs would suggest that the spread is widening again. This would mean the US 10-yr yield is starting to rise faster than German 10-yr yield and this would be positive for the Dollar. The bottom window shows the spread between the US 10-yr and the Japanese 10-yr turning up the last two weeks. A break above 2.3 would also be positive for the Dollar.

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Thanks for tuning in and have a good day!
--Arthur Hill CMT

Plan your Trade and Trade your Plan
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Arthur Hill
About the author: , CMT, is a Senior Technical Analyst at StockCharts.com. He has written articles for numerous financial publications including Barrons and Stocks & Commodities magazine. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed technician. In addition to his CMT designation, Arthur holds an MBA from the Cass Business School at City University in London.
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