German Bund Yields almost at 0.00%

The yield on the US 10-Year Treasury Note reached 1.808% yesterday, its highest level since January 2020 (pre-pandemic). However, this isn’t the only yield in town making new highs. Today, the German Bund reached a high of -0.014%, just ticks below the psychological round number resistance level of 0.00%. This is also the highest level the Bund yield has reached since May 2019! Yields had already been moving higher since making a near term low on December 8^th, 2021 at -0.395. And since December 20^th, 2021, the yield has only had two down days!

Source: Tradingview, Stone X

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German Bund yields had been making higher lows and higher highs since making a low of -.67% on November 4^th, 2020, thus creating a channel. If the Bund yield can cross above 0.00%, there is a confluence of resistance at the upper sloping trendline of the channel and the 127.2% Fibonacci extension from the highs of November 1^st. 2021 to the lows of December 8^th, 2021 near 0.03%. Above there is horizontal resistance from April 2019 at 0.102% and the 161.8% Fibonacci extension from the previously mentioned timeframe near 0.149%. However, notice that the RSI is overbought territory, at 78.71, an indication that yields may be ready for a pullback. Support is at the November 1^st highs of -0.064%, the gap-fill from January 5^th near -.115% and a confluence of support among the 50-Day Moving Average, the 200-Day Moving Average, and previous highs, between -0.299% and -0.258%.

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German Bunds and EUR/JPY have a strong positive correlation. The correlation coefficient for the two assets is +0.91. A reading above +0.80 is considered a strong correlation. Therefore, if German Bund yields continue to move higher, one can expect that EUR/JPY will move higher as well.

2 ways to use correlations to help trade

Just as Bunds bottomed in early December, so did EUR/JPY near 127.47. However, since December 20^th, EUR/JPY has had six down days (compared to Bunds two down days). EUR/JPY moved from 127.52 on December 20^th, 2021 to 131.60 on January 5^th, a gain of over 400 pips in 13 days. The pair stalled at a confluence of resistance, which includes previous lows, the 61.8% Fibonacci retracement from the October 20^th, 2021 highs to the December 3^rd, 2021 lows, and the 200 day Moving Average between 130.53 and 131.55.

Source: Tradingview, Stone X

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If price breaks above 131.55, the next level of resistance isn’t until the previous highs at 133.48. Above there is horizontal resistance at 134.12 and the 127.2% Fibonacci retracement from the previously mentioned timeframe at 135.11. Support below the 200 Day Moving Average is at 130.02, then the 50 Day Moving Average at 129.51.

German Bund yields have been on a tear lately and are on their way towards a place they haven’t been in since May 2019, 0.00%! Bund yields are also highly correlated with EUR/JPY. Therefore, if yields can break above the psychological round number resistance of 0.00%, they could bring EUR/JPY along for the ride!

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