AUD: A$ Correlations Sharply Lower With Yield Differentials, Rising For Iron Ore
AUD/USD correlations with yield differentials are back into negative territory for the past week, see the table below. Correlations are much firmer with commodity prices, particularly iron ore.
- The dip in correlations with yield differentials contrasts with the late August/early September experience when correlations were generally much more positive.
- The trend in yield differentials has generally been against the AUD. For instance, the AU-US 2yr spread is now back around -64bps, which is back to lows from mid-July. The 5yr spread is also back below 0bps (last -21bps).
- There are some important AU data releases this week (see this link for more details), but the yield differential outlook could be swamped by the US CPI print tomorrow night.
- The AUD rebound from the low 0.6700 region is more in line with the pickup in commodity prices, particularly iron ore.
- The iron ore rebound fits with better seasonal demand from China and efforts to boost the infrastructure outlook, although a cloud still hangs over the broader backdrop.
- Copper prices has also rebounded, although the correlation with aggregate base metals is lower.
- Correlations with global equities remain positive as well. AUD/USD can still play catch up with the better equities trend, although some of the gap has closed in recent sessions.
Table 1: AUD/USD Correlations (Levels)
| 1wk | 1mth | |
| 2yr yield differential | -0.63 | 0.31 |
| 5yr yield differential | -0.48 | 0.65 |
| 10yr yield differential | -0.43 | 0.57 |
| Global commodity prices | 0.68 | 0.65 |
| Base metals | 0.19 | 0.86 |
| Iron ore | 0.87 | 0.77 |
| Global equities | 0.68 | 0.85 |
| US VIX index | -0.57 | -0.72 |
Source: MNI - Market News/Bloomberg
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USDCAD TECHS: Remains Vulnerable
- RES 4: 1.3224 High Jul 14 and key resistance
- RES 3: 1.3135 High Jul 15
- RES 2: 1.3038/56 High Jul 18 / 3.0% Upper Bollinger Band
- RES 1: 1.2863/2985 20-day EMA / High Aug 5
- PRICE: 1.2795 @ 16:08 BST Aug 12
- SUP 1: 1.2744 200-dma
- SUP 2: 1.2728 Low Aug 11
- SUP 3: 1.2685 76.4% retracement of the Jun 8 - Jul 14 upleg
- SUP 4: 1.2587 2.0% 10-dma envelope
USDCAD extended losses Thursday, printing a new multi-month low in the process. This weakness marks an extension of the current bear leg. Support at 1.2767, the Aug 1 low, has been cleared and the move lower paves the way for a continuation lower. Attention is on a clean close below 1.2744, the 200-dma and 1.2685, a Fibonacci retracement. On the upside, a breach of 1.2985, the Aug 5 high is required to reinstate a bullish theme.
AUDUSD TECHS: Trend Needle Points North
- RES 4: 0.7283 High Jun 3 and a key resistance
- RES 3: 0.7246 High Jun 7
- RES 2: 0.7166 3.0% Upper Bollinger Band
- RES 1: 0.7141 76.4% retracement of the Jun 3 - Jul 14 downleg
- PRICE: 0.7102 @ 16:07 BST Aug 12
- SUP 1: 0.6965/6870 20-day EMA / Low Aug 5
- SUP 2: 0.6786 Low Jul 18
- SUP 3: 0.6682 14 and the bear trigger
- SUP 4: 0.6647 0.764 proj of the Apr 5 - May 12 - Jun 3 price swing
AUDUSD rallied further Thursday, extending this week’s bull cycle. The break of 0.7047, Aug 1 high, confirms a resumption of the uptrend that started Jul 14 and sets the scene for a continuation higher. The break has also established a bullish price sequence of higher highs and higher lows. The focus is on a climb toward 0.7141, a Fibonacci retracement. Support to watch is at 0.6870, Aug 5 low.
US TSYS: Bonds Near Highs, Yield Curves Flatter
Bonds finished stronger, near late highs on a quiet second half w/ TYU2 just over 1M well after the bell compared to 815k ahead midday, yield curves unwinding a portion of this week's CPI/PPI induced steepening.
- Muted reaction to early deflationary data: Import (-1.4%)/Export (-13.3%) prices come out weaker than expected. Tsys that were already off highs after the open continued to scale back support, albeit on light volumes, equities turning modest gains.
- Dual react: Tsy support faded after preliminary August reading of consumer sentiment from the University of Michigan climbed to 55.1 vs. 52.5 exp (51.5 in July and all-time low of 50.0 in June for comparison).
- Meanwhile, Richmond Fed Barkin midmorning comments on CNBC deemed mixed with "more rate hikes needed to control inflation" and a "lot of time before Sep meeting, keep an eye on data" weighing. Less hawkish tones in the mix with "TIGHT LABOR MARKET DOESN'T HAVE TO CAUSE INFLATION; DEMAND DEFINITELY SOFTENING, ESP FOR LOW-INCOME CONSUMER; MUST BELIEVE BAL-SHEET SHRINKING HAS TIGHTENING EFFECT."
- Blocks contributed to yield curves paring back from wk's steepening post UofM: -11,421 TUU2 104-20.88, sell through 104-21 post-time bid at 1010:56ET vs. +3,960 UXYU2 128-31.5 buy through 128-28.5 post-time offer; -25,033 FVU2 112-09.5 sell through 112-09.75 post-time bid at 1036:45ET, 112-09.25 last -.25.
- Late curve levels:
- 3M10Y -4.974, 26.663 (L: 25.199 / H: 33.589)
- 2Y10Y -7.618, -41.125 (L: -41.125 / H: -32.494)
- 2Y30Y -9.512, -14.282 (L: -14.364 / H: -5.024)
- 5Y30Y -4.728, 13.923 (L: 13.604 / H: 18.841)
- Cross asset: Stocks trading strong after the bell, SPX eminis +66.0 (1.41%) at 4275.75; Gold +11.30 at 1801.02; Crude weaker (WTI -2.59 at 91.75).
