FX beacon- why AUD traders needs to focus on the US yield curve

Lots of chatter in the market about the US yield curve headed ever closer towards inversion – clearly, much of this move has been driven by short-term rates which have seen 2yr Treasuries push to 1.19% (the highest since Feb 2020), with fed funds futures pricing close to 5 hikes through 2022.

I have shown the US 2s v 10s spread, but US 5s v 30s is certainly getting smacked and at 43bp is probably the part of the curve that will invert first. So, if we know yield curves have been one of the best predictors of future economic stress and recessions, surely it makes sense that the AUD will co-vary with curve flattening? The AUD being a beacon of cyclicality and growth expectations.

For fundamental traders, especially swing and certainly position traders, understanding what a currency pair is most sensitive to can help cultivate a short-term edge. If you know what to look at it can save you a ton of time, right?

Well, we can look at Asian equity markets and see AUDUSD fairly well correlated here and we can take our pick of the Aussie yield curve over the US curve – however, in this exercise I see a solid relationship in play between the AUDUSD and US yield curve – it tells me if US long-end rates outperform and 10yr yields drop faster than short-term rates then the AUDUSD is headed below the 70-handle and the December swing low of 0.6993.

For those trading the AUD, and who want to know why it's moving from A-B and what could cause it to go to C…the yield curve is your central guide right now.

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