Asia-Pacific Currencies Weekly Recap: High-Flying Aussie, Kiwi Drilled Lower Amid Bond Market Rout

The U.S. Dollar rose against the Asia-Pacific currencies last week, lifted by an increase in U.S. bond yields, which drove down demand for the Japanese Yen and the higher-risk Australian and New Zealand Dollars.

Government bonds, and particularly U.S. Treasuries, have become the focal point of markets globally. Traders have moved aggressively to price in earlier monetary tightening than the Federal Reserve and other central banks have signaled, Reuters said.

Bond yields have climbed this year on the outlook for massive fiscal stimulus amid continued ultra-easy monetary policy, led by the United States. At this time last year, more U.S. fiscal stimulus on top of the already existing loose Fed monetary policy, would’ve sent the U.S. Dollar tumbling. In fact, most forecasts since late last year highlighted these two reasons as the key factors that would keep the pressure on the greenback.

However, with the U.S. economy strengthening, investors now believe that cheap money and more stimulus would speed up the economic recovery, leading to a jump in inflation. Investors are selling bonds in anticipation of higher inflation, driving up interest rates while making the U.S. Dollar a more attractive asset.

Furthermore, rising yields have dampened the appeal of higher risk assets, particularly the Australian and New Zealand Dollar, which are closely linked to overpriced commodities.

Japanese Yen

The Dollar/Yen gained last week, touching its highest level since August 28. Both the dollar and yen are considered safe-haven currencies, but the Yen tends to decline when U.S. yields rise, the dollar tends to strengthen.

Essentially, it was the widening spread between U.S. Government bond yields and Japanese Government bond yields that made the U.S. Dollar a more attractive investment.

Last week, the USD/JPY settled at 106.549, up 1.125 or +1.07%.

Australian Dollar

The Australian Dollar took a hit last week, drilled lower from multi-year peaks as a rout in bond markets spread to other risk assets, spurring the country’s central bank to intervene to stem a savage selloff in government debt.

The Aussie had been flying high throughout the week as it jumped the .8000 barrier for the first time since February 2018, but reality came back with a vengeance when investors started to dump higher risk commodities and equities.