Long End Yields May Decide FX's Next Move

The FX market has been relatively quiet this week, but that doesn't mean there isn't anything to watch. The dollar-debasement trade has lost momentum, and gold volatility has compressed in line with a flat dollar.

However, the real action may be happening in the bond market. ING's Chris Turner notes that traders should be looking at the Treasury market for the next directional signal, rather than the Fed itself.

Kevin Warsh is speaking at Jackson Hole today, but his speech will likely focus on financial innovation and won't provide much insight into monetary policy. If he does touch on it, though, the reaction may not be in the front end of the market - it's the 30-year Treasury that matters.

If 30-year yields start pushing back toward 5.30%, the market will stop hearing 'hawkish Fed' and start hearing something much less comfortable: duration stress, fiscal risk, and a rising cost of capital. That could cause FX relationships to bend, making high-yielding carry currencies more vulnerable and the Swiss franc more defensive.