- Coronavirus supporting positive US dollar flows.
- Foreign residents increased their holdings of long-term US securities in December.
- AUD and JPY to continue facing pressures in US dollar strength.
Considering the coronavirus, markets are paying particular attention to global yields. The Aussie trades as a proxy to the theme of the virus and it is interesting to note that the currency continues to strength despite rate cut expectations. Looking to yields overnight, we had the Australian 3-year government bond yields falling from 0.72% to 0.70%, 10-year yields from 1.04% to 1.01%. But the markets are "pricing in just a 5% chance of easing at the next RBA meeting on 3 March, and a terminal rate of 0.46% (RBA cash rate currently at 0.75%)," according to analysts at Westpac.
Analysts at ANZ argued, however, that the market has given up on the RBA cash rate ever returning to what might have been considered ‘normal’:
"This is evident in the small difference between the RBA cash rate and the 10y overnight interest rate swap – a difference we refer to as the ‘policy expectations curve’. A flat policy expectations curve has important implications for the fixed income market. In particular, the absence of a term premium forces investors to search out spreads to generate return. We think this generally supportive backdrop for spreads will remain in place until the policy expectations curve materially steepens."
The analysts argued that potential triggers for such steepening include much higher global interest rates, a much lower AUD or a sizeable fiscal easing. "We don’t see any of these emerging as triggers for a steeper curve anytime soon."
As for US yields, the 2-year treasury yields extended yesterday’s decline, from 1.40% to 1.39% while the 10-year yields slid from 1.55% to 1.54%. This was despite a drop in US stocks owing to the news that Apple warning that disruption in China from the coronavirus will mean revenues falling short of forecasts. The tech giant said production and sales were affected, and that "worldwide iPhone supply would be temporarily constrained".
As the stock market slips away, yields tend to rise, although what we are seeing here is a risk-off theme as investors seek out safe havens in US bonds. If this is to continue, despite the narrowing of the spread between the US, Japan and Australian yields, the US dollar can continue to rise on the 99 handle regardless which should ultimately pressure the yen ad AUD, until, of course, markets begin to facto in Federal Reserve rate cuts. "Markets are pricing a 10% chance of easing at the next Fed decision on 18 March, and a terminal rate of 1.10% (vs Fed’s mid-rate at 1.63% currently, effective FFR at 1.58%)," analysts at Westpac explained.
Foreign residents increased their holdings of long-term US securities in December
Meanwhile, the details of the US Treasury International Capital Report gave a glimpse of the investment activity of foreign investors, a significant buyer base of the US government bond market was released overnight. The sum total in December of all net foreign acquisitions of long-term securities, short-term US securities, and banking flows was a net TIC inflow of $78.2 billion. Of this, net foreign private inflows were $134.2 billion, and net foreign official outflows were $56.0 billion. Foreign residents increased their holdings of long-term US securities in December; net purchases were $60.7 billion. The next release, which will report on data for January 2020, is scheduled for March 16, 2020.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
USD/JPY holds positive ground around 151.50 following Japanese CPI data
The USD/JPY pair holds positive ground for the second consecutive day near 151.45 on Friday during the early Asian trading hours. The cautious approach from the Bank of Japan to keep monetary conditions accommodative exerts some selling pressure on the Japanese Yen.
AUD/USD depreciates on risk aversion amid a stronger US Dollar
AUD/USD extends its losses for the second successive session on Friday. However, market activity is expected to be subdued due to light trading on Good Friday. Meanwhile, the US Dollar strengthens as recent data indicates annualized economic expansion in the United States, driven by consumer spending.
Gold price finishes Thursday’s session set to reach new all-time highs
Gold price rallied during the North American session on Thursday and hit a new all-time high of $2,225 in the mid-North American session. Precious metal prices are trending higher even though US Treasury yields are advancing, underpinning the Greenback.
Top 3 Price Prediction BTC, ETH, XRP: Retail watches from the sidelines with a bias for shorts
Bitcoin is showing strength as markets head into the Easter holidays. As it rises, altcoins are following suit, with Ethereum and Ripple posting almost similar gains. Meanwhile, there remains an unfilled CME Gap, with a lot of liquidity also resting above and below BTC price.
Bears have been standing before a steamroller so far this year
Despite a pushback on rate cuts from Christopher Waller, and what was supposed to be cautious trading sentiment ahead of critical US inflation data released later on Friday, the S&P 500 rose on Thursday, marking its best first-quarter performance in five years.