Forex Investment and Currency Trading

“The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.”
(FOMC statement on 31 October 2007)

However, many participants (noticeably more than January) saw the upside risk to inflation as greater than the downside risks to inflation.
The Committee agreed that that the statement to be released after the meeting should take note of the substantial policy easing to date and the ongoing measures to foster market liquidity. In light of these significant policy actions, the risks to growth were now thought to be more closely balanced by the risks to inflation. Accordingly, the Committee felt that it was no longer appropriate for the statement to emphasize the downside risks to growth.
(FOMC minutes of April meeting released on 21 May 2008)

Everything we are looking at suggests to us that we have entered into an anti-risk environment that looks scarily similar across a whole host of instruments to what happened at the start of November 2007.

U.S. 2 year yield chart

The day after the Oct 31 meeting U.S. 2 year yields peaked at 3.99%. By 04 December (less than 5 weeks later) they were down at 2.80% On 29 May we peaked at the 2.79% target just shy of the 2.80% resistance mentioned above and the 2.82% 200 day moving average.

This 154 basis point rally from 1.25% is exactly the same magnitude as that seen during the 2001-2002 cycle between November 2001 and March 2002 (2.23% to 3.77%) before the subsequent fall that saw a low of 1.02% in June 2003.

A similar development took place in the prior major easing cycle of 1989-1992 in late 1991/early 1992

In both these instances this rally did not signal the end of the down move in yields or the ending of the easing cycle by the FED which saw eases of a further 100 basis points into 1992 and 75 basis points into 2003.