How Treasury Yields Fluctuations Swayed the Currency Market - Kalkine Media

March 10, 2021 07:56 PM AEDT | By Damini
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  • The US Treasury yields retreated on Tuesday, driving strong gains in the riskier currencies like the Australian dollar, the New Zealand dollar, and the Canadian dollar.
  • The Treasury yields stabilised on Wednesday, pushing the US dollar higher and the commodity-linked currencies lower.

The continuing fluctuations in the US bond yields have been unsettling the currency market this week.  

After reaching their 13-month high level of 1.613 per cent on Monday, the Treasury yields retreated to 1.544 per cent on Tuesday as investors repurchased bonds in a sell-off that market players have considered overextended. As the US yields drop, the greenback eased from multi-month highs on Tuesday.

Interesting Read: How Bond Yields are Driving the Forex Market?

However, the US yields found some floor on Wednesday, pushing the US dollar higher with the greenback recovering some of the losses sustained overnight.

Let us quickly discuss how greenback and commodity-linked currencies responded to variations in the US bond yields recently:

US Dollar

On Tuesday, the US dollar dropped from its three-and-a-half-month high level as the US yields stabilised before the Treasury auctions and key inflation data this week. The greenback tumbled by 0.46 per cent to 91.95 after hitting 92.506 during Asian trading hours on Tuesday.

Also Read: Fed’s Dovish Stance Shoots Up Greenback to Three-Month High

The US yields gave back some ground on Tuesday after Treasury Secretary Janet Yellen delivered soothing remarks, playing down any concern that the continuing surge in bond yields reflects prospects for an outsized breakout in inflation level. Yellen said that she does not see that the markets are anticipating inflation to increase beyond the Federal Reserve’s 2 per cent objective.

Of late, the US Dollar index traded back on the positive territory amid some recent recovery in the US bond yields. On Wednesday, the dollar index strengthened around 0.2 per cent to 92.17 in Asia.

It is worth noting that the higher bond yields usually boost the greenback’s appeal as the bond rout trembles the investor confidence, stimulating demand for safe-haven assets.

Australian Dollar

The recent pullback in bond yields on Tuesday ruled in favour of commodity-liked currencies like the Australian dollar, which gained 0.9 per cent to 77.18 US cents. However, the Aussie dropped to 76.84 US cents on Wednesday as the Reserve Bank of Australia (RBA) turned down market speculations about the early rise in interest rates.

The RBA Governor Philip Lowe lately rebuffed market chatter of an increase in interest rate as early as next year, restating that it is unlikely to happen before 2024. The record-low interest rates are likely to be a part of the Australian economy until at least 2024 as the Governor sees no chances of wages growth hitting over 3 per cent before that time.

Kiwi Dollar

Akin to the Australian dollar, the New Zealand dollar also posted strong gains of 0.65 per cent to 71.74 US cents on Tuesday as the bond yields retreated. Following a surge, the kiwi dollar slid by 0.4 per cent to 71.46 US cents on Wednesday as the Treasury yields stabilised.

In addition to the Treasury yields, the recently declared retail sales data by Statistics NZ also drove the fall in the New Zealand dollar. As per Statistics NZ, electronic card retail sales plummeted by 2.5 per cent in February relative to January. The nation’s week-long lockdown in Auckland amid the emergence of fresh coronavirus cases resulted in the pullback in spending levels.

Canadian Dollar

Besides the Aussie and kiwi dollar, the Canadian dollar also strengthened against the US dollar on Tuesday as the fall in bond yields fostered the risk appetite of investors. The Canadian dollar was trading 0.2 per cent higher at 79.12 US cents on Tuesday.

In sympathy with the US Treasury yields, the Canadian government bond yields also plunged across a flatter curve on Tuesday, with the 10-year yields tumbling to 1.461 per cent. Investors are also keeping a close watch on the interest rate decision by the central bank of Canada, expected on Wednesday.


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