The Australian dollar is looking solid despite a spike in global bond yields

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The Australian dollar is trading weaker against the euro but higher against all other major crosses with moves in global bond yields playing a dominant role during Tuesday’s trading session.

Here’s the scoreboard as at 8.10am AEDT.

AUD/USD 0.7664 , 0.0003 , 0.04%
AUD/JPY 86.49 , 0.28 , 0.32%
AUD/CNH 5.0608 , -0.0014 , -0.03%
AUD/EUR 0.6471 , -0.0031 , -0.48%
AUD/GBP 0.5724 , 0 , 0.00%
AUD/NZD 1.0966 , 0.0017 , 0.16%
AUD/CAD 0.9857 , 0.0004 , 0.04%

Of all the moves, the one that sticks out is the Aussie’s slide against the euro, driven by a spike in euro area bond yields during the session.

“Markets saw bond yields move higher in Europe and in the US from a still super-strong German Ifo survey, a slightly hawkish tilt from two ECB lesser known central bankers and solid US housing data,” said David de Garis, Economist at the National Australia Bank (NAB).

The move in bond markets started in Europe following commentary from the central bank governors of Estonia and Slovakia that hinted that a shift towards normalising monetary policy may gather steam next year.

“Discussions are more and more shifting from asset purchases to possible future use of interest rates to regulate the economy,” Slovakia’s representative on the ECB’s Governing Council, Jozef Makuch, said in Bratislava, according to reports from Reuters.

Ardo Hansson, Estonia’s central bank governor, shared a similar view to his compatriot from Slovakia.

“Moving to a communication which draws attention to the multi-faceted elements of monetary policy including interest rates is probably something that we should consider over the coming months,” he said.

Those remarks, along with another strong business confidence report from Germany, helped to lift euro area bond yields and with the euro itself.

US bond yields also rose strongly, driven by a more than one-year high for building permits in November, the move in European bonds along with technical factors.

US 10-year treasury yields rose from 2.39% to 2.47% — a two-month high — and 2-year yields rose from 1.83% to 1.86%, a fresh nine-year high,” said Imre Speizer, Senior Market Strategist at Westpac.

“One explanation for the rise in yields is that the curve was extremely flat and markets judged it was opportune to enter steepening trades.”

Despite the move in US bond yields, it did little to support the US dollar which was undermined by strength in the euro. As a result, the Aussie dollar is trading close to unchanged for the session in late North American trade.

News that the US House of Representatives have passed the GOP tax bill, sending it to the Senate for final approval, had little to no impact on the greenback, suggesting that the outcome is now entirely priced into markets.

AUD/USD Hourly Chart

Turning to the session ahead, there’s a few things for traders to look out for both regionally and abroad.

“Markets will now be watching Washington and when the vote will get through the Senate,” says de Garis at the NAB. “There’s also the little matter of a Budget resolution to be passed this week to avert a government shutdown.”

In Asia, most attention will be on the release of China’s economic blueprint for 2018 scheduled which is due to arrive at some point today.

“The talk is looking quite positive for risk,” says Chris Weston, Chief Market Strategist at IG Markets.

“The view is they place less emphasis on debt reduction and that debt levels will be tolerated in a bid for higher growth, notably, given creeping concerns about a softer property market and trade threats.”

Weston adds that “this could be a highlight of the session ahead”.

On the data front, markets will receive the Westpac Leading Index and the Skilled Vacancies reports for November in Australia — neither will move the Aussie — while in New Zealand balance of payments and trade data will be released before tomorrow’s GDP report.

Elsewhere, other data highlights include German producer prices, Eurozone current account, UK CBI retail sales along with existing home sales and weekly crude oil inventory data from the US.

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