I'm not sure i understand this chart. Where is EURGBP? Where is de10y-gb10y? what is this ratio chart with a value of 0.626? I attached a simple version with both, the FX pair and yield spread. This is from 2023 and they move together pretty well. But if you look further down the history you'll see huge divergences as well and even high negative correlations at times. Cheers.
Why hard to understand? I did not verify numbers but the label seems to make it clear. It's the ratio of the German 10y yield and UK 10y yield. It's less than 1, hence differencing them results in a negative value. At least the label descriptor is pretty clear. From a mathematical perspective using ratios rather than differencing is almost always more convenient and highlights the same relationship.
1) I know it's a ratio, but it makes no sense to explain the fx/yield spread relationship through a ratio. 2) the chart missed EURGBP price, so what good does a ratio chart alone do? 3) visually both charts look the same, so why make things more complicated? A number of 0.626 tells me nothing, while knowing that Gilts pay 1.729% more yield tells me everything. Within current context it's not. Following nominal yield is much more convenient here and you get the full picture immediately. What good does a ratio do, i need to recalcuate again to tell me how much yield am i getting/paying.
It's not an fx/yield ratio, it's the ratio of German to British 10y yields. The ratio is always preferred over the difference as it lends itself to more convenient mathematical properties when performing certain computations. Believe whatever you want, your prerogative. My entire point to get involved in this thread was that yield spreads don't play out across short-term horizons. They can often, but not always, cause longer term in and outflows of certain currencies into others. But yield spreads very poorly correlate with daily moves in currencies. Am out of here.
So many people with conflicting views all trying to be right. We know that's impossible. Some are right, some must therefore be wrong. It's surprisingly easy to tell one from the other.
You would be advised to not ask me for advice in that case, and I should be advised not to freely give it.
I trust you won't lose sleep over not understanding what I posted, or its relationship, however remote, to the discussion here. Some may understand it; some may not.