Mar 24, 2014

How US bonds are putting a rocket under the Australian dollar

If the Reserve Bank is relying on a recovery in the United States economy and a hawkish Federal Reserve to bring down the Aussie dollar, it might be waiting a while.

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:

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