APAC Morning Update - 26/02/21

The NZDUSD opens at 0.7399 and AUDUSD opens at 0.7909

One word: US 10 Year Treasury Bond Yields.

Bond Yields across the board, and indeed internationally are up. The 10 in particular peaked around 1.6% this morning, and to put that in perspective in August last year they were trading at 0.53%. What does this mean? Well a lot of things - for one growth expectations are up, and with that inflation expectations. This is healthy, and what you would expect in a recovery. If you expect inflation at 2%, and growth at 6%, a 0.5% bond is not looking that hot for the next 10 years. However the implications are quite frankly huge, especially if it continues. Long term mortgage rates are going to have upward pressure, leading to more pressure on borrowers, and less upward pressure on house prices. Companies that are borrowing at very low rates will now no longer be able to, as why would you lend to a risky company, when you can lend to a safe US Government? Problem here is so many companies that are not doing great, are not going to be able to withstand the increase in borrowing costs, which makes them risker, which- you guessed it- increases borrowing costs…

So what can the Fed, and other central banks do? Well if they start to get really worried, they can buy bonds. This is what they are doing anyway to keep yields down, but they could increase their purchases, and do it at a longer end of the curve. Don’t fight the Fed is fairly good wisdom, but then again, the market is also always right… For now the Fed are playing along, saying they are happy as it is a sign the economy is doing well, but there will be a limit to that. The USD is finally getting some love, as you would expect, but remember also it is a global move higher in yields, not just the US. However, if you look at Japan, although their 10 year has ‘spiked’ to 0.14%, this is not as big an absolute move. You might just borrow at 0.14%, invest at 1.6%, and wear the currency exposure. Doesn’t sound like much, but you start to do that with Billions, then that 1% adds up, and that eventually starts to move currency pairs. Now if people start expecting the currency pair to move in their favour as well as getting paid on it, the Carry trade is on, and that is what can drive large, long term currency moves.

Global equity markets are generally off: Dow -1.1%, S&P 500 -1.6%, FTSE -0.1%, DAX -0.7%, CAC -0.2%, Nikkei +1.7%, Shanghai +0.6%.

Gold prices are off 1.3%, currently trading at $1,803 an ounce. WTI Crude Oil prices are up 0.5% trading at $63.5 a barrel

AUDUSD 0.7909 -0.7%
AUDEUR 0.6489 -0.9%
AUDGBP 0.5631 -0.1%
AUDJPY 83.97 -0.5%
AUDNZD 1.0689 -0.2%
GBPAUD 1.7749 0.0%

NZDUSD 0.7399 -0.6%
NZDEUR 0.6072 -0.8%
NZDGBP 0.5268 0.0%
NZDJPY 78.56 -0.4%
NZDAUD 0.9355 0.0%
NZDCAD 0.9296 -0.3%
GBPNZD 1.8981 0.0%