Yield Spread Model (YS)

This model screens the bond markets for the most traded currencies. For each currency cross, the model records the spread between the general levels of the yield curves in both countries. The model gives an alert, whenever it sees extreme (judged by the historical record) moves on a daily or a weekly basis. If a currency cross is not really or moving very slowly and yield spread changes are extreme, there is reason to believe that the cross should move in order to reflect the changes, favouring the currency, which is experiencing the yield curve that is rising relative to the currency for which its yield curve is falling (relatively).

We usually combine this model with a trending indicator, to avoid trying to “catch a falling knife”. The attractive situation is e.g. for a cross to trend higher in the last few days and get a strong reading in the YS Model. That would imply that the cross is likely to trend even higher in the short term (daily or weekly).