AUDUSD helped by yield spread

The AUDUSD is trading at session highs and trading up 0.70% on the day. The gain is only behind the NZDUSD which has moved up 0.80% so far today.

The rise is being helped by a divergence of rates. The FOMC yesterday kept rates unchanged with what was perceived as a more dovish tilt. Meanwhile, the RBA is scheduled to meet on November 7th with the bias tilting to a rise of 25 basis points to 4.35%.

Although the Australia 10 year yield is down 3 bps today to 4.797%, the yield has moved from 3.963% to 4.797% or 83 basis points since September 1. Meanwhile, the US 10-year yield has moved from 4.06% to 4.71% today or 65 basis points. That is 18 basis point difference.

Taking a look at the 10 year spread between Australia and US 10 year yields, since October 6th, the spread between yields has move from -25.5 basis points to +8.6 basis points.

Traders are starting to pay attention to the yield spread now with the AUDUSD pair up 5 of the last 6 days (see AUDUSD chart below). The move higher in the AUDUSD has the pair running away from the 200 and 100-hour MAs at 0.63425 and 0. 6355 respectively. It is also above the 100-bar moving average on the 4 hour chart at 0.63479 (see green line on the chart below), and the 200 bar moving average on the same chart at 0.63736. The price is currently trading at 0.6432 and approaching the high from October 11 at 0.6445.

The run higher has traders thinking about the diverging yields and diverging central bank policy. Technically, it will take a move above the October high at 0.6445, to get more buyers involved.

Risk for longs is now near 0.6400.

So yield spreads are pointing to higher AUDUSD. Will the traders jump on that trend?

PS Also helping is a risk on sentiment has improved which tends to help the AUD.

This article was written by Greg Michalowski at Source