by Nicholas Cork
A largely consolidative evening on Friday as the AUDUSD loosely held between 0.7025 and 0.7075, a test of sub 70 cents defended again for now as equity markets calmed, with the DOW being mostly in-the-money until the last hour of trade saw it sold off to close 0.3% lower. The main focus was on US treasury yields which have slipped another 0.5 bp in the 2 and 10 yr yield, back to levels not seen since July and January respectively. The significance of this is that the yield advantage the US now holds over our 2 yr yields has reduced to under 0.6% to levels also not seen since July when the AUD was above 74 cents. Since the start of 2018 when the US 2 yr yields first moved above Australia’s, the AUD was at 80 cents. From then the AUD has declined in lock-step with the change in yield differential across the calendar year as the advantage to the US grew to above 0.9%, and the AUD simultaneously first traded at its lows in late October. Over the last 6 weeks the correlation appears to be broken as the view on the US economy changed rapidly and the market plays catch-up, however the pressure has notably not eased on the AUD itself. We will continue to watch this into 2019.
On the weekend there has been some good news for global sentiment leading into the New Year with Italy’s parliament winning approval for their 2019 budget, Trump tweeting that he had a ‘long and very good call’ with China’s Xi around Trade, Nth Korea calls for more meetings with South Korea as both sides start work together to connect railways, and Putin has told the US that Moscow is ready to talk on a “wide-ranging agenda.”
Today sees Chinese Purchasing Managers data (manufacturing and non-manufacturing) and the focus will be on the manufacturing sector as it has not been below 50 (which means contracting) since July 2016, and the forecast is for 49.9. Locally we have Private Sector and Housing Credit data.
I hope you all have a wonderful New Year, and looking forward to what should be an eventful 2019.
AUD vs AU/US 2 YR interest rate spread across 2018
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