Effect of Bond Spread on Currency Exchange Rates
When we are monitoring bond spread and there is hope for changes in interest rates, we will know which currency will move higher or weaker. For more details, the following picture is the explanation (bond spread VS AUD / USD).
For more details, we can observe the price chart of the AUD / USD currency pair with the difference in bond yield values between Australia and the US for the 10-year period, January 2002 to January 2012.
It should be noted that when the Bond Spread increased from 0.50% to 1.00% from 2002 to 2004, the price movement of the AUD / USD currency pair also increased by 50% from 0.5000 to 0.7000 (2000 Pips)
The same thing happened in 2007 when the bond spread rose from 1.00% to 2.50%, the price of the AUD / USD currency pair also experienced an increase from 0.7000 to 0.9000 (up 2000 Pips again bro 🙂
And so also when there was a recession in 2008 ( subprime mortgage ) almost all central banks cut interest rates for the price of the AUD / USD currency pair back to 0.7000 from 0.9000 (-2000 Pips).
One factor that might affect this is because when bond spreads are starting to rise, that is between Australian bond yields and US bond yields, many forex traders start opening AUD / USD BUY (LONG) positions to get carry trades.