AUD/USD - Yield spread drops in the AUD-negative manner
- 10-year AU-US yield spread falls to fresh lows since 1998.
- AUD put bias intact.
AUD/USD is trading marginally weak in Asia at 0.7840 but faces the risk of bigger losses due to falling yield differential and AUD put bias seen via risk reversals.
The yield on the 10-year Australian government bond yield fell below its US counterpart amid US rate fears. As of writing, the difference of the spread between the 10-year Aussie bond yield and the 10-year US Treasury yield is -10 basis points, meaning the US bond yield offers 10 bps higher than the Australian yield. So, as per yield differential, the future seems bright for the American dollar.
Also, the one-month AUD/USD risk reversals show the volatility premium for AUD puts (sell AUD) remains higher than the volatility premium for AUD calls (buy AUD). In simple terms, the options market continues to be bearish on the Aussie dollar.
That said, the overnight gains in the US stocks seem to have stabilized the risk sentiment and despite the negative yield spread the Aussie dollar is still being treated as a risk currency. Further, the fears of a full-blown trade war between the US and China and the resulting hardening of commodity prices bodes well for the Aussie dollar. Consequently, the AUD has been able to avoid sharp losses despite the worsening yield differential.
AUD/USD Technical Levels
Valeria Bednarik, Chief Analyst at FXStreet, says the downside risks are intact. Bednarik explains, "the risk remains skewed toward the downside in the short-term, given that in the 4 hours chart, the pair was unable to surpass a bearish 20 SMA, currently the immediate resistance around 0.7860, while technical indicators recovered from oversold levels, but pared their advances below their mid-lines. The immediate support, on the other hand, is the 0.7820 level, where the pair has the 50% retracement of the December/January rally."
Support levels: 0.7820 0.7775 0.7730
Resistance levels: 0.7850 0.7890 0.7930