Yesterday, we saw a big crack in the risk positive sentiment momentum when we had comments from Australian miners that Chinese output of steel was going to slow in 2012, which would limit its demand for commodities such as iron ore. The news created concern that China’s slowdown would be more pronounced and the main reaction in currency markets yesterday, and now following through in today’s session was AUD and NZD weakness.
While yesterday, it was the Asian-Pacific commodotity currencies feeling the brunt of sentiment, today risk aversion showed itself in a big move back towards the safety of US, UK, and German bonds. Bond prices move inversely to yields, so as demand increased and prices rose, yields fell, and fell rather sharply.
That undoes some of flight from safe bonds seen the previous 2 weeks, and pressured equities markets including the S&P500. With bonds showing a push towards safety the Japanese Yen joined the USD in showing strong gains against higher yielding rivals – paring overnight gains in key JPY crosses on the back of a relatively more upbeat Asian session.
For a technical look at the EUR/USD see today’s Technical Update: EUR/USD Forms a Double Top Below 1.33
For a technical look at the AUD/USD see today’s Technical Update: AUD/USD Slides Below 1.05; A Trade Plan for a Pullback
For a technical look at the GBP/USD see today’s Technical Update: Forming a Double Top; 1.5740-1.5750 is a Key Support Area
Let’s take a quick look at our safe haven 10-year yields, and their fall today:
As we can see, all 3 have seen a sharp drop in yield, with Germany leading the way, which may mean that the recent gains in the bond market may find some push back, especially if growth concerns in Asia tend to undermine the so far positive story of the US economy seen in the 1st quarter and the relative calm in European periphery bond markets.
The next key risk events will be China’s Manufacturing PMI and Germany PMI’s which can help to give further direction to sentiment as we move into Thursday’s NY session.
See the Previews here: EUR/USD: How Will Euro Respond to Flash March PMI Data?
And here: Preview: China HSBC Manufacturing PMI – Key to Commodity and Risk Outlook
Will this pullback in Yen and USD pairs be temporary or will it be the start of a more pronounced correction? That’s the key question we ask, and we will be looking at bond markets the rest of the session and tomorrow for further clues.
We will cover this pullback in bond yields and see if we have an extension of USD and JPY strength in Thursday’s Market Intelligence Briefing. For information on special subscription rates for FXTimes briefings, click here.
Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.