(See previous posts on extremely tight correlation between AUDJPY and SPX)
Post FOMC Follow Up:
Despite being the core focus of markets going in, nothing of substance out of the Fed / Powell regarding Yield Curve Control. Markets are now risk-off, with AUD leading the way down. Pre-positioning long AUDUSD on hopes of US YCC are unwinding, and dragging down global equity futures.
Why were traders long AUD for YCC upside catalyst? Same reason that AUDJPY has been fueling SPX bull market off March lows - the carry trade.
Sept 2016: BOJ becomes the first major central bank to adopt YCC, pinning the 10y JGB yield at "around 0%." With the JPY rate leg of FX pairs now effectively fixed in place, AUDJPY carry trade was put back on in size by an army of levered up traders.
As the global macro picture started deteriorating, RBA joined the ~50 something other central banks who slashed rates in 2019, and with a collapsing AU-JP yield spread, AUDJPY carry trade was no longer as attractive.
March 19 2020: As global risk assets plunge, RBA becomes the second major central bank to implement YCC on the front end of the Aussie curve. Now, with two central banks pinning both sides of AUD and JPY yields in place and suppressing rate volatility (or at least perceived to be), AUDJPY carry trade makes a massive comeback on max leverage, with proceeds used to fund long risk assets- notably SPX & FANGS. This is not only why AUDJPY & S&P E Minis are so highly correlated off the March lows (even on an intraday tick for tick basis), but also in part explains how SPX can rally when the US eco data has never looked more horrendous. AUD doesn't care about US jobless claims, COVID cases, eruption of protests, Trump vs China etc. And since actual global commerce and transactions had come to a halt, speculative FX flows had ever more impact on spot FX movements. This was evident in early June, when AUD broke out ahead of SPX's upward correlation, as Australia reported another record current account surplus for its 4th consecutive quarter - in other words, real world transactions in exports made their presence known in the FX markets.
June FOMC: Leading into FOMC, there was plenty of chatter that the US Fed might become the third central bank to adopt YCC. This would then have the same effect - kill volatility in front end rates, making AUDUSD a carry trade candidate alongside AUDJPY. But alas, YCC was not a primary topic of focus, and now getting priced out of AUD upside, and down goes global risk assets in tandem with AUD.
IF AUD has finally reached the end of its massive bull run started in March, with hedge funds' net short positioning piling on as we head into AUD futures June expiry/roll, then SPX caps its relentless rise.
Post FOMC Follow Up:
Despite being the core focus of markets going in, nothing of substance out of the Fed / Powell regarding Yield Curve Control. Markets are now risk-off, with AUD leading the way down. Pre-positioning long AUDUSD on hopes of US YCC are unwinding, and dragging down global equity futures.
Why were traders long AUD for YCC upside catalyst? Same reason that AUDJPY has been fueling SPX bull market off March lows - the carry trade.
Sept 2016: BOJ becomes the first major central bank to adopt YCC, pinning the 10y JGB yield at "around 0%." With the JPY rate leg of FX pairs now effectively fixed in place, AUDJPY carry trade was put back on in size by an army of levered up traders.
As the global macro picture started deteriorating, RBA joined the ~50 something other central banks who slashed rates in 2019, and with a collapsing AU-JP yield spread, AUDJPY carry trade was no longer as attractive.
March 19 2020: As global risk assets plunge, RBA becomes the second major central bank to implement YCC on the front end of the Aussie curve. Now, with two central banks pinning both sides of AUD and JPY yields in place and suppressing rate volatility (or at least perceived to be), AUDJPY carry trade makes a massive comeback on max leverage, with proceeds used to fund long risk assets- notably SPX & FANGS. This is not only why AUDJPY & S&P E Minis are so highly correlated off the March lows (even on an intraday tick for tick basis), but also in part explains how SPX can rally when the US eco data has never looked more horrendous. AUD doesn't care about US jobless claims, COVID cases, eruption of protests, Trump vs China etc. And since actual global commerce and transactions had come to a halt, speculative FX flows had ever more impact on spot FX movements. This was evident in early June, when AUD broke out ahead of SPX's upward correlation, as Australia reported another record current account surplus for its 4th consecutive quarter - in other words, real world transactions in exports made their presence known in the FX markets.
June FOMC: Leading into FOMC, there was plenty of chatter that the US Fed might become the third central bank to adopt YCC. This would then have the same effect - kill volatility in front end rates, making AUDUSD a carry trade candidate alongside AUDJPY. But alas, YCC was not a primary topic of focus, and now getting priced out of AUD upside, and down goes global risk assets in tandem with AUD.
IF AUD has finally reached the end of its massive bull run started in March, with hedge funds' net short positioning piling on as we head into AUD futures June expiry/roll, then SPX caps its relentless rise.