A calendar spread for the summer
2 July 2021
Post-RBA meeting and Aud-Chf
8 July 2021
Winter is my favourite season for many reasons and is the supporting actor in this article. During the winter of 2020/2021 in the northern hemisphere, we have seen the culmination of the new wave of Covid-19 infections and a mad rush to vaccinate in an attempt to eradicate the virus as soon as possible.
The economies of almost every country have been severely affected, with many businesses, shops and offices closed or very limited in their working hours and services.
On the other side of the planet, in Australia, the situation was certainly better. People were enjoying the summer sunshine, the pandemic had had less impact on the country and its economy, and this had translated into a strong, sustained rise in the Australian dollar.
As the months passed, the seasons were reversed. In the "northern" hemisphere, net of variants, thanks to the summer season, warm temperatures and the vaccination campaign, the situation has improved a lot and businesses have reopened almost everywhere.
In Australia, on the other hand, our supporting actor, winter, brought an increase in infections and above all the Delta variant of the virus. And also because of a vaccination campaign that is struggling to get off the ground, a lockdown has been put in place that will have repercussions at an economic level, although for the moment limited to a couple of weeks or so.
Market sentiment is almost certain that the Reserve Bank of Australia will cut interest rates soon. Of great importance is Wednesday's meeting. The RBA is likely to comment on possible interventions to optimise the bond purchase plan, paying particular attention to the yield curve (YCC).
Yield Curve Control (YCC), also referred to as an interest rate peg is an unconventional way for a central bank to promote economic growth and inflation. YCC occurs when a central bank publicly announces and executes purchases of government bonds at a specific maturity to ensure that yields are maintained at the desired level.
Because bond prices are inversely related to their yields, buying bonds and pushing up their price leads to lower rates. In contrast, under Quantitative Easing (QE), a central bank injects a certain amount of money into the economy by buying Treasury securities.
The yield spread of 10-year bonds is usually correlated to the performance of the reference currency pair, and lower rates mean a weaker Australian dollar. Let me show you an example. I have chosen the currency pair Aud-Chf for various reasons (which I will not explain in this article). Below you can see the chart of the currency pair with the AU10Y-CH10Y yield differential.
You can see how the two charts are well correlated and how over the last three months, the yield differential of the two 10-years has fallen much more than Aud-Chf, which is still at a medium/high level.
As a result of the above and more, Aud-Chf is bearish for me but I will discuss this in the post RBA meeting article.
Market sentiment is almost certain that the Reserve Bank of Australia will cut interest rates soon. Of great importance is Wednesday’s meeting. The RBA is likely to comment on possible interventions to optimise
I am a macroeconomic and financial analyst with over 30 years’ experience, including two years as a fund manager. I specialise in currencies and commodities, and I am the author of several successful books on trading, macroeconomics, and financial markets.
