That’s the spread between Australian and US 2 year bond rates.
In other words, its the premium that international investors receive for holding Australian assets/bonds instead of US treasuries. At 7 points that spread is back near the lows this century and it makes Australian bonds (the 10’s spread is also at multi-year lows) simply unattractive for foreign investors to purchase and hold.
Spreads matter for “off-index bets like the Australian dollar. And that’s one of the primary reason why, when the weaker than expected wages data saw a recalibration – again – of interest rate expectations in Australia yesterday that the AUDUSD was sold heavily.
Now, no currency, no exchange rate is really just a single factor model. At the very least there is the other side of any given currency pair. But what see in the collapse of this spread at the same time that commodities are under pressure, when folks are getting worried about Chinese growth, and when risk aversion is rising as stocks start to drift, is an utter abandonment of support for the Aussie dollar.
Sure, as we saw last night, it can stage rapid and aggressive recoveries but overall it is in a primary downtrend at the moment and real enduring and underlying support won’t reemerge until it again becomes relevant to traders and investors portfolios.
That means something has to change. A weaker US dollar perhaps, a big lift in commodity prices maybe. Or, as is my bent, the Aussie has to go lower to make it the type of relative value bet that a trader or bond manager can take even at a paltry pick up to the US dollar.
Medium-term that probably means it needs to drop into the mid 73 cent region. Maybe lower.
In the immediate term, however, the release today of October employment data in Australia is of vital import. It will either arrest the collapse we have seen in recent days for a time, or it will exacerbate and accelerate it.
It depends on the data of course. But on that front, a print of 30 or 40 thousand jobs would see it rocket back toward 0.7630. But with the market expecting a print of 17,500 any undershoot is likely to hit harder than a beat given the bearish backdrop of stocks, metals, iron ore, and global investor risk appetite short term.
In other forex market developments, the US dollar took a belting in the European session before the retails sales and core inflation data was released. That combination of mild beats helped turn the buck around and the Euro has dipped back to 1.1800 from a high around 1.1860. Likewise, the USDJPY is back up at 112.92 from a low of 112.47.
The Kiwi is largely unchanged at 0.6875, Sterling too now back at 1.3173, while the CAD has lost about 0.4% against the USD with USDCAD sitting at 1.2772. That looks like a petro-move as the NOK has lost 0.6% as well and is at 8.2320 this morning.
It was a game in two halves overnight. Initial US dollar weakness gave way to a solid recovery after the release of that mildly better than expected US data. That the Reaction was so swift tells me more about the very short term positioning the market had built up – that is short dollars – in the previous 36 hours. It is hard to judge though if last night’s move in the EURUSD was it for now. In both Euro and DXY terms, that’s possible with the peak/nadir of either measure in line with previous levels where the dollar has reversed.
The outlook for the Yen is a little different and potentially more bullish, however. I say that because the Yen usually benefits when markets go “risk off” and that feels like it is a growing chance in the days and weeks ahead. Indeed, even though the USD caught a bid on the retail sales and inflation data US 10’s rallied. That’s a safe haven bid. Throw in the lift in the VIX of 11.5% to 12.91 overnight and it’s easy to see why USDJPY might still have a downside bias.
It’s pulled up a little as the pace of the fall was so swift relative to recent price action. But the chance of a move toward the 200-day moving average at 111.70/80 has to be high.
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