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An Important Indicator in FX Trading that You Mustn’t Miss
Mitrade Team
2021-02-25 1148

Last week we discussed using steepeners across bond spreads as a guide for FX flows and trade direction.

The trade(s) was to be based on being neutral USD and following pairs that would benefit from a positive and widening differential in their respective 10-years to the US 10-year. This trade seems to be lucrative, as illustrated here by the AUD/USD the movement in the US 10-year.

AUD/USD to the US 10-year 

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It’s even more significant when you look at the rise in the Australian 10-year and see that the spread between the Aussie-US ten year is now over 25 basis points.


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You can also see that the steepness of the Australian bond compared to its US peer over the past week is much stronger and it has led to an acceleration in the appreciation of the AUD/USD.

 

The reflation trade is only just beginning in our opinion and it is clearly going to be a theme of the coming 4 to 6 months as the world comes out of the COVID crisis. It will likely mean that signals like that seen in the Aussie-US bond spread will continue to drive FX trading.

However, we are mindful of the central banks – Already this week US Federal Reserve Chair Jay Powell has signalled the Bank is unmoved by the markets view on inflation and that its current stimulus packages will stay in place for the foreseeable future even if inflation materialises significantly. This ‘talk’ did see US bond yields ease slightly and will likely trigger slight selling in risk pairs such as the AUD/USD.

But as the charts this week show – the bond market is in a very solid bear market and that trend has not been altered despite Central Banks telling us otherwise. We will continue to monitor these market trends closely.

 

This information has been prepared by Mitrade. In addition to the disclaimer below, Mitrade does not represent that the information provided here is accurate, current or complete, and therefore should not be relied upon as such. This information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Mitrade is not a financial advisor and all services are provided on an execution only basis. We advise any readers of this content to seek their own advice. Reproduction or redistribution of this information is not permitted.

 

Derivatives trading involves risks and the above information is not suitable for everyone. Refer to our PDS and ensure you understand the risks involved.


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