With sector-specific issues at play, commodity prices have experienced higher volatility. There are higher long-end bond yields, but the emphasis for AUD/ will be on the difference.
The FOMC met market expectations and announced that the Fed will taper its bond buying program. This is almost certain to be announced at the November meeting. According to the RBA minutes, the current monetary policy stance was confirmed by the RBA until February 2022. Currency markets began to focus on bigger issues as both central banks were moving in the same direction.
Markets are weighed down by the Evergrande saga as some bond coupons have been paid while others are still to be. There is still uncertainty as to what the future holds. According to the market, although China’s government is expected to take precautions against contagion, investors will feel pain.
Prices for risk-sensitive assets may be affected by Evergrande’s losses. The AUD/USD could be vulnerable to these sentiment shifts.
Although iron ore prices stabilized after Monday’s sell-off, they still remain far from the highs of earlier this year. The commodity may see lower prices in the future due to decreased Chinese demand. A price of US$80/tonne could make it unprofitable for marginal producers and limit supply.
Iron ore is a key focus for the AUD currency exchange market. However, Australian exports oil and gas, as well as coal and liquefied natural gas (LNG) make a substantial contribution to export earnings. These markets trade higher despite numerous supply restrictions that are unlikely to be solved soon.
The US yield curve steepened after the FOMC meeting with long-term end bonds backing up. The spread to the US 10-year government yields is gaining parity and Australian 10-year government yields have followed suit. This could be a positive for the AUD/USD if Australian yields rise above US yields.
The Australian retail sales data will be available on Tuesday, and the building approvals on Thursday. On Thursday, the US will also see data on GDP and unemployment claims.
