How Bond Yields are Driving the Forex Market

  • March 03, 2021 08:20 PM AEDT
  • Damini
    Damini
    Author Damini
    73 Posts

    Damini is a Senior Research Analyst at Kalkine Media Pty Ltd, with around 4 years of rich experience catering to media domain. She has key exposure to economics and equity research. Her expertise lies in performing economic and trend analysis and pro...

How Bond Yields are Driving the Forex Market

Source: Andrii Yalanskyi, Shutterstock

Summary

  • The bond markets faced a huge market sell-off last week amid fears of growing inflation, stimulating a rise in bond yields.
  • The US bond yields have begun to level off this week after rising above their highest level since February 2020.
  • The US dollar weakened as Treasuries continued to retreat, rekindling demand for relatively riskier currencies like the Australian dollar.

The bond market has begun to recover from the recent market sell-off, inducing a fall in the US Treasury yields. Last week, the sudden rise in the US bond yields soothed the enthusiasm of stock participants around the world, causing a sharp sell-off in the bond market.

The US government bond yields surged as the optimism over improving economic growth and acceleration in global vaccination drive prompted speculations that inflation will soar. Expectations of higher inflation made investors doubt how long central banks could keep cash rates down.

After rising above their highest level since February 2020 (1.6 per cent) last week, Treasuries have started to level off, with benchmark yields holding below initial highs. This has re-established some calm to the global markets while rekindling demand for riskier assets.

As Treasury yields continued to retreat, the safe-haven US dollar lost some charm in the international market recently against relatively riskier currencies like the Australian dollar. However, certain safe-haven currencies like the Japanese yen and Swiss franc reversed earlier weakness, bouncing off multi-month lows.

US Dollar Weakens as Treasury Yields Retreat

Improving risk appetite in the global market lately pushed the US dollar down, with the greenback losing ground against a large basket of currencies.

The index measuring the dollar against six of its major peers was little changed in the early trading session on Wednesday after plummeting from a near one-month high level. The US Dollar index recently tumbled to 90.815 with a fall of 0.22% against the broad basket of major currencies. At the time of writing, the index was trading at 90.83.

Also Read: US Stocks Rise As Bond Yield Stalls, Rate Fear Wanes

The weakness in the US dollar delivered a leg up to dollar-denominated gold, with the spot gold recovering from lows to be steady at US$1,736.16 per ounce early on Wednesday. The fall in the US dollar made gold less costly for holders of other currencies.

Australian Dollar Continues to Rebound

As the US dollar weakened, relatively riskier currencies like the Australian dollar rebounded, with the AUD/USD pair climbing to a daily high of 78.3 cents on Tuesday. In addition to easing of the US dollar’s demand, the Reserve Bank of Australia’s recent decision to keep interest rates unchanged at 0.1% gave a slight uptick to the Aussie dollar.

Related Read: ASX 200 today: Rising bond yields weigh on equities; what to expect

The Australian dollar further cheered a rise in the nation’s GDP by 3.1% over the December 2020 quarter. The country’s Q4 GDP surpassed expectations, coming in at -1.1% in Y-o-Y terms against the anticipation of -1.8%. The latest GDP figures provided a strong indication that Australia is actively recovering from the downturn triggered by the coronavirus pandemic. The outperformance of the nation’s economy attracted more AUD/USD bulls towards the currency market.

Over the recent days, improving copper and iron ore prices have also fuelled optimism in the commodities market, elevating the Australian currency to a level not seen in the last three years.  

The current scenario demands a close watch on bond markets by policymakers as the fluctuating bond yields might hinder the US’ strong economic recovery from the virus crisis. The growing volatility in the bond markets is fuelling bets for significant policy changes across the world’s major central banks.

 


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