Recent market trends show a strong correlation between Chinese bond yields and the performance of commodity currencies like the Australian, Canadian, and New Zealand dollars.
Commodity currencies are tightly linked to Chinese yields, with correlations up to 0.95 over the past month. While Federal Reserve monetary policy decisions and yield differentials remain important, it's been China's interest rate outlook that's been far more influential on their performance. The charts below emphasize this point. Whether it's short or long-dated Chinese bond yields, AUD/USD has been tightly hitched to them over the past month, with correlations ranging from 0.83 to 0.
93 for five and 10-year yields. The relationship with USD/CAD has been even stronger than with the Aussie, with correlation coefficient scores ranging from -0.87 to -0.95 over the same period. As Chinese yields have sunk, so too has the Loonie against the buck. Even though not as robust as the relationship with the Aussie and Loonie, a correlation with NZD/USD has also been evident with scores ranging from 0.78 to 0.85 over the past month. It needs to be emphasized that it's not just Chinese bond yields driving AUD/USD, USD/CAD and NZD/USD moves. As they are priced against the US dollar, it's certain information in the Fed's updated dot plot later Wednesday will influence broader market movements, not just the FX universe
Commodity Currencies Chinese Yields Interest Rates Market Correlation FX Market
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