FX: What usually happens ahead of US curve inversions? – Nordea Markets

Martin Enlund, Research Analyst at Nordea Markets, suggests that if the recent flattening pace continues, the US yield curve might invert by early 2019.

Key Quotes

“Even if the curve inverts early next year, it usually takes 18 months until a recession follows.”

“So let's not care about US recessions too much, and instead look at what your favourite FX cross or pair usually do ahead of inversions.”

“To answer this question, we analysed how more than one thousand FX crosses behaved in the six months ahead of these US curve inversions: 1978-08-17, 1989-01-05, 1998-05-26, 2000-02-11 and 2005-12-27. These dates were chosen because the curve had been steep for quite some time running into these inversions, and as the curve often becomes volatile after an inversion.”

“We found for instance that the NZD generally weakened, that the TRY was shot to pieces, and that USD/NOK and USD/SEK if anything tended to head higher... Sounds similar? In short, the FX market is also showing a late-cyclical mindset.”