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Stock markets fall amid rising bond yields, creating a generally challenging global backdrop for the Australian dollar.

The Australian dollar was among the worst-performing major currencies on a day when US ten-year bond yields rose to their highest levels since January 2020 and sent the majority of the world’s major stock markets into the red.

The “high beta” Australian dollar has a close correlation with risk sentiment, rising when markets rise but falling when they sell.

The exchange rate between the British pound and the Australian dollar rose a quarter of a percent to trade at 1.8970, while the exchange rate between the Australian dollar and the US dollar fell by a third percent to trade at 0.7187.

“Markets apparently fell on rising bond yields,” said Neil Wilson, chief analyst at Markets.com. “The key thing to watch today as US traders return to their desks after the MLK recess is whether the bond rout continues or abates.”


GBP to AUD and AUD to USD

Above: GBP/AUD (top) and AUD/USD (bottom) since 2021.

  • GBP/AUD reference rate at publication:
    Spot: 1.8967
  • High bank rates (indicative band): 1.8303-1.8436
  • Payment specialist rates (indicative band): 1.8796-1.8872
  • Find out about specialist rates here
  • Set up an exchange rate alert, here

If US bond yields continue to rise, the cost of funding dollar-denominated debt around the world will continue to rise, creating headwinds for a global economic recovery.

Australia’s main source of foreign exchange is its commodity basket, dominated by iron ore, and when global growth slows, demand for its exports also slows.

As long as yields continue to rise, the Australian dollar could remain under pressure.

Upside returns are expected from a combination of interest rate hikes and quantitative tightening by the US Federal Reserve in 2022 and 2023.


Ten-year US yields

Above: The yield paid on ten-year US Treasuries continues its steady rise, signaling the end of “easy money” in the pandemic era.

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The United States is currently experiencing inflation levels not seen since 1982, which is putting pressure on the Fed to raise interest rates and reduce its accommodative monetary policy.

“We can expect bumps and retracements as markets adjust to inflation dynamics and Fed policy expectations,” Wilson said.

As investors anticipate the withdrawal of “easy money” over the coming months and years, it is the sectors of the market that have benefited the most that appear to be the hardest hit by the unwind.

Tech stocks are particularly affected, as is the cryptocurrency market.

For the Australian dollar, further headaches come from expectations of below-trend growth rates in China.

“The surge in domestic and global Covid cases is also expected to level off and China’s activity data remains at significant risk given its zero Covid policies ahead of the Lunar New Year,” said Richard Franulovich, chief intelligence officer. FX strategy at Westpac.

“In addition to all of the above, the situation in Ukraine has not improved at all given the news of cyber attacks. course of the week,” he added.