Will the Australian Dollar ” Yield” to rate differentials

Australia’s shrinking yield advantage over the US has stirred the Aussie dollar bears, but the currency is deemed unlikely to plunge hard.

The yield spread between Australian and US 10-year bonds has narrowed to just 18 basis points, and last week even fell to 16 basis points, the lowest in 16 years.

Australia’s shrinking yield advantage over the US has stirred the Aussie dollar bears, but the currency is deemed unlikely to plunge hard.

The yield spread between Australian and US 10-year bonds has narrowed to just 18 basis points, and last week even fell to 16 basis points, the lowest in 16 years.

The interest-rate premium could soon disappear completely as the US Federal Reserve continues to hike rates and the Reserve Bank of Australia remains firmly on hold.

The last time the yield gap turned negative the Aussie touched a post-float low of US47.76¢ in 2001, causing some to speculate the currency could face a larger sell-off.

But ANZ head of forex research Daniel Been said that the bursting of the internet bubble at the time had led to a rush out of riskier assets, punishing the Aussie more than other currencies.

“We do not think that the current narrowing in spreads can, in isolation, drive the Australian dollar back below US70¢,” Mr Been said.

“One of the reasons why people buy Aussie dollars is it has been a relatively high yielder,” said Philip Moffitt, Asia-Pacific head of fixed income at Goldman Sachs Asset Management.

“That’s changing. More exposure to China, no rate movement here and rate convergence with the US suggest the Aussie will go lower.”

Consequently, the currency has been one of this quarter’s underachievers, falling 3 per cent against a greenback that itself has been under pressure due to growing doubts about US President Donald Trump’s ability to push through his pro-growth policies.

Hedge funds and other large speculators have unwound almost all their bullish Aussie wagers, slashing them to the lowest since January, US Commodity Futures Trading Commission data show.

“Iron ore prices remain at the heart of the matter amidst China growth concerns. But sliding oil prices have compounded the view, putting pressure on all commodity-linked currencies,” OANDA senior trader Stephen Innes said.

The Sydney Morning Herald

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes