Impact of Chinese Yields on Commodity Currencies
- Commodity currencies have shown a remarkable correlation with Chinese bond yields, indicating relationships that range up to 0.95 this past month.
- The direction of the Fed's dot plot may influence market trends in the short term, yet it is the outlook of China's bond market that plays a crucial role in determining currency performance.
Market Overview
If you’re involved in trading commodity currencies like AUD/USD, USD/CAD, or NZD/USD against the US dollar, monitoring the changes in the Chinese yield curve could be highly beneficial. Although the Federal Reserve's monetary policy and interest yield differentials are significant, the interest rate situation in China has proven even more impactful on these currencies.
Commodity Currencies Decline Amidst Falling Chinese Yields
The following analysis illustrates this correlation clearly. The left panel shows trends in Chinese bond yields across various maturities, while the center panel highlights the recent performance of commodity currencies against the US dollar. The right panel illustrates the rolling 20-day correlation between these two sets of data.
AUD/USD Analysis
AUD/USD has demonstrated a strong connection with Chinese bond yields recently, with correlation coefficients between 0.83 and 0.93 for five- and ten-year yields. Notably, the correlation with USD/CNH has been less strong at -0.62, indicating that the Aussie dollar is more than just a reflection of the yuan; it serves as an indicator of China's economic growth and inflation expectations.
USD/CAD Analysis
The relationship between USD/CAD and Chinese yields has proven even stronger than that of AUD/USD, with correlation metrics fluctuating between -0.87 and -0.95. This indicates that as Chinese yields decline, the Canadian dollar has also weakened against the US dollar.
NZD/USD Analysis
While the correlation for NZD/USD has not been as pronounced, there have been noteworthy connections, with scores ranging from 0.78 to 0.85 in the last month.
Performance Analysis of Commodity Currencies
AUD/USD Technical Outlook
AUD/USD is currently facing challenges after breaking its recent uptrend line. The pair has been rejected at previous support levels repeatedly and closed below wedge support recently. Both RSI and MACD indicators signal bearish momentum, suggesting a focus on selling opportunities, particularly if the market does not exhibit oversold conditions. Support is minimal until the 0.6270 level, with notable resistance around 0.6400.
USD/CAD Technical Outlook
USD/CAD is on an upward trajectory, consistently approaching new yearly highs. Although there are signs of overextension, the momentum indicators suggest that buying strategies on dips remain favorable. An important support level is noted at 1.4340, with potential for further advancement toward 1.4668.
NZD/USD Technical Outlook
NZD/USD is navigating a falling wedge pattern, but the price action has been inconsistent. Recent movements hint at a potential reversal pattern, although current signals appear mixed, suggesting that volatility may increase ahead of the upcoming Fed announcements. Sellers are likely to dominate if the price can’t hold above 0.5800.
Focus on the Fed's Dot Plot
The implications of the Fed's updated dot plot will be significant in shaping market strategies moving forward. Key points of interest include:
- The December interest rate decision is largely anticipated, with minimal surprise expected.
- Market participants are looking towards potential rate cuts in 2025, with revisions to previous forecasts being critical for market reactions.
- Estimates regarding the long-run neutral rate are likely to increase from the previous 2.9%, which could subsequently influence longer-term bond yields and currency markets.
