Treasuries prices continued to rise on Tuesday after the publication of discouraging existing home sales data in the US. Together with that we could observe an increase in speculations on the market regarding the upcoming testimony of Fed’s Chairman Ben Bernanke on Friday. Many traders are now waiting for some concrete information regarding the quantitative easing program. In addition, a certain bit to such kind of rumors could have been offered by the recent speech of the Fed’s manager Charles Evans, who announced that the recession risks have considerably increased.

September futures for the price of the 10-Year US Treasury Notes (CBOT, daily graph).
Theoretically we could presume that the speculations on the subject of QE expansion in the US can in the short-run (before Bernanke’s testimony on Friday) cause a rise in the EUR/USD pair and the drop in USD/JPY. Nevertheless, taking into account that idea, we would not hurry to open any positions.

Yield curve in the US (Federal funds futures, CBOT, %).
Another argument in favor of the fact that the market is waiting for new stimulus measures packages or some moves from the Fed’s side towards the support of American economy is the sharp decline of the yields on the federal funds futures in the US till the end of the year. Such curve may be explained also by the fact that some investors are formally letting the US federal funds rate drop to 0% from the current – 0%-0.25%, which is basically another argument in favor of downtrend game in USD/JPY (target 80) till the end of the year.

Spread (the difference in the yields) between the 2-Year US Treasury Notes and 2-Year German Bunds
We should particularly emphasize a yield comparison dynamics of the American and German 2-year bonds. In this case we are prone to pay our attention on the significant drop in the spread of the 2-Year government notes of both countries from 0.24% in the beginning of August to 0.09% on August 25, considering this as a euro-negative background in the mid-term. Everything can be explained in a following way:

• Expectations regarding the normalization/tightening of the monetary policy from the ECB’s side has totally gone to a naught; the closest ECB meeting, in this regard, puts pressure on euro
• Investors are hurrying to switch to the short-term German bunds, which can also mean a rapid worsening of the situation with the risk appetite; a massive risk aversion may contribute to the subsequent drop in the cross-rates EUR/JPY, GBP/JPY;
• Perhaps, there are certain fears on the market regarding the economies of the “PIGS” countries; a number of investors may be afraid of the earnings reports coming from Greek banks next week, someone might have been confused by Irish credit rating downgrade by S&P recently.

Yield curve in Great Britain (3M Sterling, %).
A negative aspect for sterling meanwhile is still the subsequent drop in the probability of the rate hike in Great Britain in the 1h2011. This autumn, to our mind, we are still expecting the speculations on the subject of Bank of England’s necessity to copy the policy of the Fed. The drop target for GBP/USD this autumn is 1.49-1.50
 
Konstantin Bochkarev, currency strategist
of company Admiral Markets.
 
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