Conversation About Tight Bond Spreads Continues To Hold The Aussie Dollar Down

Originally published by AxiTrader

Almost everywhere you look at the moment when reading research about the Australian dollar the first thing you'll see is a discussion about the lack of yield pick up between Australian bonds and their US counterparts.

It's the big story that explains why the Aussie dollar has struggled to break its big downtrend from its last foray above 81 cents. Indeed while it's the dominant conversational and research narrative the collapse in the bond spread - from around half a percent positive in the 2-year back in September to just slightly negative this morning - has been responsible for big falls in economist and strategists estimates of AUD/USD "fair value".

That means that even though iron ore has recovered strongly from recent lows, copper is still up at levels not seen since 2014, global growth continues to point solidly toward another good year in 2018, and stock price rises across the globe are suggestive that investors are in a positive mood, the Aussie dollar is still languishing.

To be fair the kiwi and Canadian dollar aren't exactly shooting the lights out either - even though the US dollar is under a little pressure.

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But for the Aussie of compression to and now through US 2-year rates which is the big handbrake on the Aussie dollar is the show stopper. It's this collapse in the yield spread - and what the gap between it and where the AUD/USD rates is presently - that is the dominant narrative.

Indeed there is much focus on exactly where AUD/USD was last time the 2-year spread was negative - below 55 cents.

Anyway, we'll see what time brings with this spread and the AUD/USD.

As I wrote in Markets Musings earlier, readers know I’ve been banging on about this for some time, so the fact I’m now reading it everywhere could be a sign that for the moment it is baked into the cake. That suggests while stocks remain strong, while metals and iron ore are doing likewise, then the chance for an AUD/USD break out are growing.

The key level to watch is 0.7635/40 a break could signal a run of a cent or more.

On the downside 0.7590/0.7600 is short-term support and then it's 0.7555.

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Have a great day's trading.