How US bonds are putting a rocket under the Australian dollar

The Reserve Bank of Australia has a problem. It is relying upon a United States recovery and hawkish Federal Reserve to bring down the Australian dollar.

But although US bond markets are beginning to price interest rates rises in the US, they are only doing so at the short end of the curve. Longer duration bonds are the ones that determine carry trades from cheap US dollars into the higher interest rates of other nations and they aren’t buying what the Federal Reserve is selling.

Friday evening saw more bullish Australian dollar action. It was a night of subtle “risk off” but not for the Aussie, piling on 0.5% and threatening 91 cents again:

The long-term chart is now unmistakably bullish, with an inverted head and shoulders bottom and ascending triangle forming:

The recent commitment of traders report is also showing large and small speculators covering their shorts:

Not yet net long but trending that way. So, what’s going on? Unusual moves in US bond markets is what. Last week saw lots of comment about the Fed’s hawkish shift and its effects on the US yield curve. Sober Look has a nice summary.

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