DXY Bounces Back Above 106.00 Amid US/China Tensions; AUD/USD Drops 1.3% on Dovish RBA

Key Points

• USD rebounded on Tuesday with the DXY moving back above 106.00 with focus on geopolitics and higher US yields.
• USD/JPY bounced 0.9% back to the upper 132.00s amid a sharp rise in US yields.
• AUD/USD slumped 1.4% on a dovish 50 bps rate hike from the RBA.

Buck Rebounds As Geopolitical Tensions Simmer

The US dollar mustered a powerful rebound on Tuesday, with the DXY gaining 0.7% to move back above the 106.00 level that it let go of last Friday, with the index having found strong support at its 50-Day Moving Average just above the 105.00 level earlier in the session. Analysts said the buck was supported by a risk-averse macro tone amid concerns about an escalation in economic tensions between the US and China, the world’s first and second largest economies, after US House Speaker Nancy Pelosi landed in Taiwan, despite China threatening consequences for such an action.

But more importantly for the buck was a sharp, sudden bounce in US bond yields across the curve that bolstered the currency’s rate advantage versus its major G10 peers. US 2-year yields rose 20bps to back near 3.1% and 10-year yields rose 17 bps to the 2.75% area. Analysts couldn’t pin the rally in US yields on any one theme in particular. Some said it was a relief rally after Pelosi landed in Taiwan without a military conflict being triggered.

Others said that it could have been due to chatter amongst prominent macro analysts on Tuesday about how bond markets are underpricing inflation risks and underestimating the Fed’s resolve to tighten. Others said it could be due to the risk that worsening US/China economic tensions result in structurally higher inflationary pressures. Either way, the sharp bounce sent USD/JPY lurching higher.

USD/JPY Rallies on US Bond Yield Bounce

The pair, which is highly sensitive to the differential between long-term US and Japanese bond yields, was last trading about 1.0% higher on the day just under 133.00, having at one point dipped under 130.50, meaning USD/JPY has bounced close to 2.0% from intra-day lows. The US yield rally/haven demand induced buck bounce pressured EUR/USD and GBP/USD, with dropped 0.75% and 0.5% to just below the 1.0200 and 1.2200 levels respectively.

The drop in sterling was somewhat smaller given a continued shift in the market’s view as to how big Thursday’s rate hike from the Bank of England will be. According to Reuters, money markets were pricing a 95% that the bank accelerates its pace of rate hikes to 50 bps, up from an implied 80% chance earlier this week.

Aussie Battered on More Dovish Sounding RBA

The worst performing of the major G10 currencies on Tuesday was the Australian dollar, which was last down about 1.2% on the day versus the US dollar. AUD/USD was last trading in the 0.6930s, having started the day in the 0.7030s, weighed amid what traders interpreted as a more dovish tone from the Reserve Bank of Australia in its latest monetary policy announcement.

The RBA raised benchmark interest rates by 50 bps to 1.85% as expected, but added a new caveat to its monetary policy statement which noted that there was no pre-set path for policy moving forward. It suggests “the RBA is still prioritizing achieving a soft landing if inflation expectations remain anchored as they assess they are,” analysts at NAB said. “Some new elements of the RBA statement give the impression that the Board is getting closer to the point at which it will pause the tightening cycle,” the head of Australian economics at CBA said.

Weakness in the Aussie and strength in the US dollar also weighed heavily on the kiwi, with NZD/USD losing about 1.0% on Tuesday to drop back under its 50DMA at 0.6300 and fall into the 0.6270s. The Canadian dollar, meanwhile, was largely shielded against the buck’s strength on Tuesday and was last trading flat in the 1.2850 area amid a rise in oil prices.