Charts Of The Day: Risk aversion in the bond market

Market Analysis / 4 Min Read
Milan Cutkovic / 09 Jul 2021

HIGHLIGHTS:

  • Investors turned risk averse today amid turbulences in the bond market while currency traders also showed little appetite for risk
  • Yen catches a bid, leading to a reversal in cross pairs; GBP/JPY makes a break and could see a deeper correction; AUD/JPY should run into strong support
  • Gold regained some ground and traders may be tempted by cross pairs

Investors turned risk averse today amid turbulences in the bond market. The US 10-year yield dropped to 1.25 % on Thursday as the bond market has seen a sudden reversal. Market participants are becoming increasingly concerned about the effects the Delta variant will have on the global economic recovery. Furthermore, fears of persistently high inflation are easing, which is putting some pressure off yields.

The recent economic data has been mixed. US jobless claims increased to 373,000 in the previous week, exceeding expectations. The US job market continues its sluggish recovery, which will make it more difficult for the Federal Reserve to unwind its ultra-loose monetary policy. The FOMC meeting minutes showed once again the central bank´s hawkish side, but also highlighted that most members are not in a rush to hike rates.

The US500 index came under pressure today. It recovered from the sell-off later in the US trading session, but traders are already eyeing a test of the 4245-68 support area. The former level needs to hold, or negative momentum might accelerate and US500 could test support at 4136 points soon.

GBP/JPY

And it wasn’t just equity markets being affected by the sudden risk aversion as currency traders showed little appetite for risk today. The Japanese Yen – a traditional safe haven – caught a bid, which led to a reversal in the cross pairs.

GBP/JPY broke below the 151.30 support level, which is signaling a continuation of the correction towards at least 149. While the overall uptrend remains intact, the currency pair could see a deeper correction should the risk aversion persist.

AUD/JPY

Similar price action was seen in AUD/JPY. The daily close below 82.12 support is signaling that the currency pair could test the 200 DMA (currently 80.20) very soon. AUD/JPY should run into strong support ahead of the psychologically important 80 level, and buyers are likely to emerge there in larger numbers. However, until that level is reached, the pressure on the currency pair might intensify.

Gold Markets

Gold regained some ground today. However, the US Dollar is benefiting from the risk aversion too, therefore traders might look at the cross pairs rather than XAU/USD.

XAU/AUD is in the spotlight, as it saw a decent recovery and briefly touched the 200 DMA today. A clear break above this line of resistance could potentially trigger a recovery rally towards A$2700.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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