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AUD/USD - risk reversals flat lined, yield differential hovers near 4-month low

  • AUD/USD risk reversals show lack of bias in the options market.
  • 10Y AU-US yield spread/differential shows signs of life, but still hovers near 4-month low.

Risk reversals

The AUD/USD one-month 25 delta risk reversal continues to move sideways in the range of -0.60 to 0.80. The consolidation seen on the above chart shows a lack of bias or indecision in the options market.

Yield differential

  • The 10-year yield spread hit a 4-month low of 24.3 basis points on Friday and currently stands at 27.7 basis points.
  • A slight recovery, though encouraging, has failed so far to lift the AUD/USD pair above the 200-day MA level of 0.7697.

RBA has more reason to be cautious than optimistic

Kathy Lien from BK Asset Management writes, "having traded in a relatively tight range over the past week, AUD/USD is prime for a breakout and according to the table below, the central bank has more reason to be cautious than optimistic.  Although retail sales stabilized after falling in September, zero growth in demand means spending is weak. Labor market activity and the annualized pace of inflation has also deteriorated on the back of softer manufacturing, service and construction sector activity, giving the RBA very little reason to alter their bias. The good news is that consumer and business confidence is up and the currency is down. But In the context of rising U.S. rates, the RBA doesn't need to be all that cautious for AUD/USD to fall yet given how much it has declined over the past 2 months (nearly 5 cents), a tinge of optimism would send AUD/USD towards 0.7750 quickly."

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