A pullback in various risk assets started last week. That was particularly notable in tech heavy US equity indices (e.g. the Philly SOX: -7.2%), as well as other key asset prices (e.g. like Bitcoin which was down 12.4% last week*). There was also a strong rally in US Treasuries and the US dollar (i.e. classic risk aversion/flight to safety).
Of interest, amongst the G10 currencies, the US dollar was strongest against the CAD (+1.4%); AUD (+2.2%); & the NZD (+2.4%). With that, the Aussie dollar gave back all of its YTD gains last week, and is now back at/testing its 50 day moving average (fig 1). That sell-off, though, wasn’t driven by changes in the US and Australian government bond yield spread. That is, US yields fell faster than Aussie ones (which is usually associated with AUD strength). The typical correlation between the yield spread and the Aussie dollar therefore broke down (fig 2), as the Aussie dollar was swept up in general risk aversion (and as such disconnected from its ‘traditional’ drivers – i.e. in this instance, the yield spread).
Added to that, the market is currently net SHORT (fig 3), and the currency is oversold, with a number of short term models generating BUY signals.
The question therefore becomes: What might drive the unwinding of bearish positioning in the Aussie dollar? All eyes, in that respect, will be on this week’s ‘Two Sessions’ event in China (which is often used by the authorities to announce key policy decisions). A stimulus announcement, if significant (& if it happens), would likely provide fuel for a rally in key China-sensitive assets (i.e. including commodity sensitive currencies like the Aussie dollar).
*albeit BTC bounced sharply over the weekend after Trump’s comments about digital currency reserves.
Fig 1: AUD-USD futures candlestick with 50 & 200 day moving averages
Fig 2: AUD-USD vs. Australian less US 5yr sovereign yield spread (pp.)
Fig 3: Net speculative LONG/SHORT positions in the Aussie dollar vs. AUD-USD
