Here at the beginning of the year, there are a number of interesting developments in the major currencies and their alignment with interest rate spreads. Today we look at some examples of the widest divergences.
A brief closing note
Risk was off to the races again today as the market was able to apparently sweep aside any worry about the implications for higher interest rates after the very strong ADP and ISM non-manufacturing numbers saw a sharp bond sell-off. The major US indices posted new highs for the cycle. Interestingly, the employment sub-index of the ISM non-manufacturing survey showed a weakening in employment trends – to a barely expansive 50.5 in 52.7 in November. This is a more than a bit of a red flag and makes us reluctant to take the ADP reading at face value, even if we suspect that the job market is showing some slow improvement. On the FX side, the bottom falling out of the bond market kept the fires burning under the JPY crosses, as USDJPY is closing the day well above 83.00 and most other JPY pairs were also higher on the day. The USD rally remains very much on despite the potential for negative spin off the ISM employment shortfall, with EURUSD moving back towards the lows of the day late, and AUDUSD not able to keep its head above parity despite the continued blowout in equities.
Risk was off to the races again today as the market was able to apparently sweep aside any worry about the implications for higher interest rates after the very strong ADP and ISM non-manufacturing numbers saw a sharp bond sell-off. The major US indices posted new highs for the cycle. Interestingly, the employment sub-index of the ISM non-manufacturing survey showed a weakening in employment trends – to a barely expansive 50.5 in 52.7 in November. This is a more than a bit of a red flag and makes us reluctant to take the ADP reading at face value, even if we suspect that the job market is showing some slow improvement. On the FX side, the bottom falling out of the bond market kept the fires burning under the JPY crosses, as USDJPY is closing the day well above 83.00 and most other JPY pairs were also higher on the day. The USD rally remains very much on despite the potential for negative spin off the ISM employment shortfall, with EURUSD moving back towards the lows of the day late, and AUDUSD not able to keep its head above parity despite the continued blowout in equities.
Interest rate spreads
Today we highlight a number of currency pairs in which the movements in the currencies are showing interesting divergences relative to the movements in interest rate spreads. Note in all of the charts below that the interest rate spread is displayed on the left side while the currency exchange rate is shown on the right-hand axis.
Today we highlight a number of currency pairs in which the movements in the currencies are showing interesting divergences relative to the movements in interest rate spreads. Note in all of the charts below that the interest rate spread is displayed on the left side while the currency exchange rate is shown on the right-hand axis.
Charts: AUDCAD and AUDUSD vs. interest rate spreads
The longer term AUDCAD chart is interesting versus the spread in the two countries’ 2-year swaps. The late outperformance of the Aussie before the meltdown of the last few days may have been on the strength in metals prices (particularly copper and the implications for BHP, the gargantuan Australian miner) and the general strength in equity markets, while CAD was a bit weaker on the exposure to a supposedly weak US economy, etc. But now, with Aussie worries rising as China starts to clamp down and with US data surprising to the upside, the loonie is looking relatively stronger, even from an interest rate perspective despite the BoC’s downshifting of expectations at the last few meetings.
The longer term AUDCAD chart is interesting versus the spread in the two countries’ 2-year swaps. The late outperformance of the Aussie before the meltdown of the last few days may have been on the strength in metals prices (particularly copper and the implications for BHP, the gargantuan Australian miner) and the general strength in equity markets, while CAD was a bit weaker on the exposure to a supposedly weak US economy, etc. But now, with Aussie worries rising as China starts to clamp down and with US data surprising to the upside, the loonie is looking relatively stronger, even from an interest rate perspective despite the BoC’s downshifting of expectations at the last few meetings.
The AUDUSD chart shows the spread in 2-year swaps at a new low. Were it not for equity market strength and generally positive risk, the pair would be trading far lower as indicated by the relative interest rate pressures and we can only imagine how downside volatility might pick up if we get a 6-8% correction in major equity markets.
Chart: USDJPY
It’s easy to see where the upside pressure on USDJPY is coming from if we look at the interest rate spreads. There is far more volatility in US rates and thus, when rates are on the rise again, as they were today in a huge way, US rates are far quicker to rise and fall.
It’s easy to see where the upside pressure on USDJPY is coming from if we look at the interest rate spreads. There is far more volatility in US rates and thus, when rates are on the rise again, as they were today in a huge way, US rates are far quicker to rise and fall.
Chart: NZDNOK
Here we revisit NZDNOK, which has backed up higher despite interest rate pressure suggesting that the pair should be falling again. We can only guess that the Euro has dragged the NOK down with it to at least a small extent. But note how the interest rate spread has led quite clearly at the last couple of turns.
Here we revisit NZDNOK, which has backed up higher despite interest rate pressure suggesting that the pair should be falling again. We can only guess that the Euro has dragged the NOK down with it to at least a small extent. But note how the interest rate spread has led quite clearly at the last couple of turns.
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