AWARDS
This last week of May saw the market dominated primarily by risk news related to the conflict with Iran. 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, renewed military action in the Persian Gulf has been reported since Monday.
What is perhaps most 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 bonds 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 oil news, we believe the long-term side has 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 end of the 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 end-of-the-second-quarter targets (e.g., EUR/USD 1.1600 and AUD/USD 0.7200).
This week, we're updating our month-end FX trading signal model. While we're not currently seeing clear trading signals, we've 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 month-end.
