AUD/USD, AUD/NZD Aim Higher as Treasury Yields Climb on Reflation Theme

AUD/USD, AUD/NZD, Treasury Yields, APAC Trading – Talking Points

Equity pressure heats up as S&P 500 extends lower for fifth consecutive day
Asian equity prices may fall as rising government bond yields caution investors
AUD/USD, AUD/NZD may be set to extend recent highs on bullish technical outlooks

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The S&P 500 closed in the red on Monday, its fifth consecutive decline marking the longest stretch of daily losses since early 2020. Technology shares declined sharply with the Nasdaq Composite, which posted a 2.46% decline as rising Treasury yields pressured equity valuations. The Dow Jones Industrial Average managed to gain 0.09% while the small-cap focused Russell 2000 index dropped 0.69% on the day.

Elsewhere, gold and silver prices rose along with industrial metals like copper and zinc. The weaker US Dollar helped propel precious metals higher as investors continued to strengthen their outlook on the global recovery. XAG/USD outpaced gold with a 3.18% gain against the yellow metal’s 1.44% rally. WTI crude oil prices rose over 2% as supply issues support energy prices.

10-Year Treasury Yield, US Dollar, S&P 500– 15 Minute Chart

Chart created with TradingView

Tuesday’s Asia-Pacific Outlook

APAC equities may follow Wall Street lower as investors brace for a potential correction in prices to account for the sharp rise seen in government bond yields. Hong Kong’s Hang Seng Index (HSI) dropped 1.06% to start the week on Monday and China’s Shanghai Composite moved 1.45% lower. Australia’s ASX also moved lower. Japan’s Nikkei 225 managed to climb 0.46%, however.

While the equity market appears to have temporarily lost favor among investors, risk-sensitive currencies have not. The Australian and New Zealand Dollars have pushed into fresh multi-year highs to start the week as rising commodity prices suggest the reflation trade is in full swing. The economic rebound theme has indeed strengthened, with Australia officially beginning its vaccination program on Monday.

Moreover, the US’s $1.9 trillion USD Covid relief package is set to receive a vote in the House this week which will set up the bill to move into the Senate, and perhaps to President Joe Biden’s desk, by the end of February. Democrats in the US now appear to be ready to push the bill through without GOP support in the first major test of power since having cemented Democratic control throughout the House, Senate, and White House.

There is also talk that President Biden is now prepared to announce an agenda to begin work on a massive infrastructure package next month. If the Democrats on Capitol Hill manage to pass the Covid package without GOP support, they may likely attempt to capitalize on the momentum by quickly pushing through any infrastructure bill presented by the White House.

Tuesday’s economic calendar is rather sparse but the morning kicked off with retail sales data out of New Zealand, with a -2.7% print on a quarter over quarter basis for Q4, according to the DailyFX Economic Calendar. China is slated to release January data for home prices later today. Japan’s market will be closed to celebrate the Emperor’s Birthday.

AUD/USD Dollar Technical Outlook

The Australian Dollar has made a sharp move higher against the US Dollar, with AUD/USD breaking above the 0.7900 psychological level earlier this week. The cross is now eyeing the 161.8% Fibonacci extension from the January to February move. Prices look set for a possible extension higher as the MACD indicator flashes a bullish signal with its increasing divergence from the signal line. However, the Relative Strength Index (RSI) is in overbought territory, indicating a possible pullback into consolidation, or perhaps even a reversal lower although the trend remains bullish.

AUD/USD Daily Chart

Chart created with TradingView

AUD/USD Dollar Technical Outlook

While not as impressive of a move, the Australian Dollar has rallied to challenge a descending trendline from the August swing high against the New Zealand Dollar. AUD/NZD breached above the 78.6% Fibonacci retracement from its January – February move on Monday and momentum appears to be holding strong with an increasing MACD divergence. RSI remains in neutral territory, just above the 63 mark.