AUD/USD Intermarket – Lifted by falling Fed rate hike bets, yield spread unchanged

AUD/USD pair clocked a high of 0.7710 yesterday and currently trades around 0.7630 levels.

Lifted by drop in Fed rate hike bets

Fed kept rates unchanged as expected on September 21, but remained data dependent as opposed to widespread belief that the central bank would begin building group for a move in December.

Consequently, December rate hike bets as represented by Fed funds futures fell from near 60% to below 50%. At the time of writing, December rate hike bets stood at 48%.

Bond yield spread largely unchanged

The 10-yr and 2-yr Aussie government bond yield spread has largely remained unchanged since September 21. 10-yr yield spread has actually narrowed from 48 basis points on Sep 21 to 43 basis points. Meanwhile, the 2-yr yield spread has remained stagnant at 83 basis points. This forces us to question whether the rally in the pair is likely to be short lived.

Supported by Oil

Spike in oil prices on Wednesday lifted Aussie dollar as well. However, Thursday’s gains in oil prices failed to lift the AUD.

Moreover, Deutsche Bank mess and renewed fears of banking crisis in Europe could have weighed over Aussie bond yields. However, banking concerns also means further delay in the rate hike. Thus, rally in AUD/USD pair appears legitimate.