No positive reaction from AUD/USD despite more stimulus policies from China
In addition, today’s more-than-expected 25 bps cut (the consensus view was a 15 bps cut) on China’s 5-year loan prime rate, the benchmark for mortgage rates to 3.95%. This latest cut is the largest since 2019 but has failed to provide a positive feedback loop for the AUD/USD where it shed by -0.14% on an intraday basis at this time of the writing.
Based on an intermarket perspective, it seems that the ongoing weakness in AUD/USD is likely to be primarily driven now by the timing and pace of the US Federal Reserve’s highly anticipated interest rate cut cycle initiation in 2024 which in turn impacts the fixed income yield spread between the 2-year US Treasury note and Australia government bond.
The hotter-than-expected US CPI print for January has pushed back the expectations of the first Fed rate cut to June from March (priced at the start of the year based on the CME FedWatch Tool) and reduced the number of expected cuts from six (at the start of the year) to four before 2024 ends.
A widening of the yield discount between 2-year Australian government bond over US Treasury note has put downside pressure on the AUD/USD
A less dovish Fed has put downside pressure on the 2-year negative yield spread between the Australian government bond and the US Treasury note where the spread has declined by -50 bps from 15 January to 19 February, making the Australian government bond less attractive to the US Treasury note, in turn capping AUD/USD’s potential upside movement.
Bearish breakdown from “Head & Shoulders”
