Yields are screaming. How does that affect AUD/CAD?

Close-up of market chart

Yields around the world are on the rise.  In some places, such as emerging market countries, yields are rising more rapidly than in others.   In the US, yields are playing catch up as the 2-year yield crossed 1% for the first time since February 2020, before the coronavirus took over the world.  In the 10-year bond, yields reached a high of 1.866% on Tuesday.  This is the benchmark’s yields highest level since January 9th, 2020 when it reached a high of 1.9%.  However, in doing so, the 10-year yield broke above some key resistance:

  • The 2021 high at 1.774%
  • The 200 Weekly Moving Average at 1.783%
  • The 50% Fibonacci retracement level from the highs of November 2018 to the lows of March 2020, near 1.83%.

On a weekly timeframe, the next level of resistance isn’t until the November 4th, 2019 high at 1.968% and then the big, round number resistance level of 2%.  Support is back at the 200 Week Moving Average and the 2021 highs mentioned above.

20220118 US10Y weekly ci

Source: Tradingview, Stone X

What does that have to do with AUD/CAD?  On a daily timeframe, AUD/CAD currently has a strong negative correlation with US 10-year yields.  The correlation coefficient is currently -0.93.  Any correlation above +0.80 or below -0.80 is considered strong.  A reading of -1.00 is a prefect negative correlation, meaning the 2 assets move in opposite directions 100% of the time.  A reading of -0.93 is pretty close!   Just as US 10-year yields have broken above the 50% retracement from the February 2020 low to the January 2021 high, AUD/CAD has broken below its 50% retracement level from February 2020 high to the February 2021 low.  In addition, the pair has now traded within pips of its December 2021 lows.  However, notice the RSI is diverging with price, an indication the pair may be ready for a bounce. Will AUD/CAD continue lower?

20220118 audcad daily ci

Source: Tradingview, Stone X


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Coincidentally, on a 240-minute timeframe, the correlation coefficient between US 10-year yields and AUD/CAD is also -0.93! Therefore, on the short-term timeframe, the negative correlation is strong as well.  This means that If yields continue higher, AUD/CAD should continue lower. A break of the 0.8972 level could usher in stops losses.  Support isn’t until the 61.8% Fibonacci retracement level from the previously mentioned timeframe at 0.8810 (see daily).   Horizontal resistance above is at 0.9037, 0.9100, and 0.9159.  If US 10-yer yields move lower and/or prices bounce with the RSI on the daily, AUD/CAD could pause at any of those levels.

20220118 audcad 240 ci

Source: Tradingview, Stone X

US 10-year yields continue to make new highs.  These yields have a strong negative correlation with AUD/CAD.  Therefore, if yields continue higher, AUD/CAD should continue lower.

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