AUD/USD Value Emerging, but Coronavirus Fears Dominate for Now

Based on the improving short-term yield spread, AUD/USD is a strong candidate for a sharp recovery...

FOREX 10

Risk appetite has gone from bad to worse today, with major indices trading lower by roughly -3% across the board and US 10-year yields hitting all-time record low levels intraday.

When it comes to the FX market, one interesting dynamic at play in the current environment is the balance between relative yield spreads and risk appetite. As traders simultaneously sell risk assets, including higher-yielding G10 currencies like the Australian dollar, and buy perceived “safe haven” assets like US bonds, pairs like AUD/USD look increasingly appealing (maybe “decreasingly unappealing” would be more apt) from a relative value perspective.

Looking at the chart of the AUD/USD pair against the spread between Australian and US 2-year bond yields, we can see a clear divergence has taken hold since mid-January, with Australian yields holding up relatively well while the aussie continues to hit new lows against the greenback:

Source: TradingView, GAIN Capital

Speaking bluntly, with traders far more concerned with the return of their capital than the return on their capital in the current environment, this divergence is not surprising. However, when the market starts to conclude that the spread of coronavirus is back “under control” (whenever that may be), FX traders will quickly look to scoop up currencies fell too far, too fast during this risk-off phase. Based on the improving short-term yield spread, AUD/USD is a strong candidate for a sharp recovery when that happens.


Related Articles

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.