AWARDS
This last week of May saw the market dominated primarily by risk news related to the conflict with Iran. The news flow on this front was mixed. On the positive side, there were signals from prominent figures in both the United States and Iran indicating progress in negotiations and that a formal agreement to extend the current ceasefire for a significant period could be signed in the coming days. On the negative side, new military action has been reported in the Persian Gulf since Monday.
What is perhaps more interesting is the volatility in the 10-year US Treasury yield. Last week, as COZ6 approached $93, the 10-year yield hit its highest level since January 2025, reaching 4.67%, while the spread between 10-year and 2-year notes reached its highest level since March, standing at 54 basis points. As of this writing, the 10-year yield has fallen back below 4.50%, and the spread has returned to 42 basis points, near its lowest levels since April 2025.
While it's tempting to attribute this to the oil news, it appears to us that the long-term portion also experienced some positioning-related evaporation, which has since resolved, thus eliminating another source of potential volatility in the currency market. Therefore, our forecast last week, which predicted the path of least resistance to the stronger US dollar within our forecast ranges for the second quarter (e.g., EUR/USD 1.1450 and AUD/USD 0.7000), has been proven wrong, and the spot price is instead much closer to our targets for the end of the second quarter (e.g., EUR/USD 1.1600 and AUD/USD 0.7200).
This week, we are updating our month-end FX trading signals model. While we are not currently seeing clear trading signals, we have decided to make some improvements to the model to increase its accuracy and gain more insight into the timing of month-end equity rebalancing flows and their impact on FX price action. We note the possibility that these flows could drive JPY selling approximately one day before the end of the month.
